Month: September 2014

It’s easy to feel that your mutual fund is underperforming, but determining whether that is actually the case is a complicated equation that must take several factors into account. These include the following:

Is the fund “underperforming” relative to other funds? Different securities perform differently because they have different investment objectives, strategies, and risks. Before concluding that your fund is performing badly relative to another fund, be sure you’re comparing apples to apples.

Is the fund “underperforming” relative to what it has returned in the past? Markets fluctuate. Sometimes there are periods of exceptionally high performance, and sometimes the bubble bursts. You can’t expect a certain level of return based on what your fund did in the past.

Is the fund “underperforming” relative to the goals you set – and if so, how did you set those goals? Many investors assume that a fund that has returned 10 percent over a certain period is better than a fund that has returned 5 percent, and they invest in the better-performing fund. But the better-performing fund may have obtained higher returns by taking on greater risk. At another time under different market conditions it may perform less well than the one that previously returned 5 percent.

Is the fund “underperforming” relative to an index? You can’t compare your fund to just any index. There are many indices, each of which is designed to benchmark a certain type of fund. So, if the Dow Jones Industrial Average, (which is the average value of 30 large industrial stocks) is up 10 percent for the year, and your fund is only up 5 percent, before you label your fund as “underperforming,” ask if it makes sense to compare your fund to the Dow.

Before you cash in your “underperforming” shares, ask yourself the questions above, because your fund may not really be performing as badly as you think.

When volatility strikes the stock market, some investors take refuge in bonds. But while bonds are generally less risky than stocks, they, too, have risks.

Perhaps the greatest is the risk that a rise in interest rates will cause the value of your bond investments to decline. Unfortunately, you can’t eliminate interest-rate risk, but you can take steps to protect yourself.

• One such step is investing in bond mutual funds instead of individual bonds. Although a fund’s net asset value (NAV) will drop when interest rates rise, the fund will replace maturing bonds with higher-yielding bonds. So, higher interest rates can actually help you achieve a higher total return from a bond fund in the long run.
• Another step is thinking about when bonds mature. If the bonds in a fund mature when interest rates are rising, the fund will have to purchase new bonds at a higher price. As a result, the fund’s NAV may drop, but because interest rates are rising, the fund’s yield may rise. The opposite is also true. Generally, the longer a fund’s “average maturity,” the greater the NAV change when interest rates move.
• Finally, you may want to consider a bond fund’s duration, which indicates how much a fund’s price will rise or fall for a given change in interest rates. For example, if rates rise by 1 percent, the NAV of a fund with a 10-year duration would drop by about 10 percent; if rates fall by 1 percent, the NAV of the same fund would increase by about 10 percent.