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New funds vs. old funds: How to rate them

- Alan Lavine and Gail Liberman



Should you invest in a new fund or an older fund with a good track record? That depends. Here are some points worth evaluating based on the age of your fund.

Possible new fund positives:

  • Newer funds with just several million dollars in assets under management are more flexible than older funds with at least $1 billion. New funds can move in and out of stocks more quickly to take advantage of opportunities than larger, older funds.

  • Research by No-Load Investor, an Ardsley, N.Y.-based newsletter, found that over the past 20 years, 30 of 47 new funds launched by Fidelity Investments outperformed the S&P 500 in their first year of operation.

Possible negatives of new funds:

  • A new fund could come out at exactly the wrong time, and you could lose your shirt. Although about three-quarters of Fidelity Investments' new funds beat the market in their first year, not all new funds do. Nor does this mean that all new Fidelity funds will beat the market. A new fund with a manager that has a limited track record could wind up being a poor investment.

  • Fund groups often play tricks on investors with new funds. They may launch several new funds that hold hot stocks. Then the fund group formally introduces only the hottest-performing fund.

  • New funds typically have higher expenses than older funds. Expenses eat into returns.

Possible positives of old funds:

  • An older fund has a track record. You can see how the fund performs in up and down markets. You can compare the fund to its peers. You can look at the fund's annual rate of return over one year or over 20 years.

  • An older fund may have an old, experienced manager.

Possible negatives of old funds:

  • Older funds also may have had several different portfolio managers over the years. The fund may have racked up its best returns by a manager that no longer runs the fund. The new manager may not be doing as well. Don't get snared by this trap.

  • Older funds typically perform more in line with the stock market averages. It's rare to find a fund that has outperformed the market over more than 10 years. But if the market is performing well, you're golden!

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).


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