DON'T CHASE MUTAL FUND 'SUPER-WINNERS' (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

With more than 10,000 mutual funds on the market, you'll almost always be able to find, at any given time, a few funds that are earning truly extraordinary returns, but before you invest in these funds, take a good, long look at what you're buying.

Some of these "super-winners" could be showing triple-digit returns in a particular year. If you look beyond the current numbers, however, you may find some things that are unsettling.

First, an ultra-high performing fund may have a high "expense ratio" a figure used to determine the percent of assets taken from a fund to cover all operating costs. High expenses can cut into your returns.

Even more importantly, funds with stratospheric short-term performance may have poor long-term track records. To really get a sense of how a fund has performed in different economic environments, you should look at its five- and 10-year returns. Even these longer-term figures can't really help you predict how the fund will do in the future, but they will give you a more realistic sense of what the fund's managers have achieved over time.

Finally, some funds achieve their high short-term numbers because most of their assets are heavily concentrated in a few different stocks in one particular sector. That can work if the sector is "hot," but when it cools off, the fund's performance will plummet. The more diversified a fund's holdings are, the less susceptible the fund is to sudden "meltdowns."

Instead of chasing after those funds with sizzling short-term returns, how should you go about building a portfolio of mutual funds?

Start by identifying your own investment goals and preferences and discussing them with your investment representative.

If you want your mutual funds to help pay for college for your children or a comfortable retirement for yourself, then you will want funds with significant growth potential, such as stock funds, but if you also need current income, you may be interested in adding bond funds to your mix.

After you've identified the type of funds you're interested in, seek out the ones with proven management and investment philosophy that you are comfortable with. Also, it's important to watch fund fees and expenses.

If a fund has achieved strong long-term results while keeping its expenses down, then you can be fairly certain that a good management team is at work.

On the other hand, funds do change managers; when this happens, you may want to see if the fund still makes sense for you.

Above all else, don't look to get rich quick from mutual funds. They are truly designed for long-term investors. If you can keep that prospective in mind, and you do your homework, then you won't have to worry about pursuing the so-called "super-winners."

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.