Finding the best mutual funds is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

Don't Trust Mutual Fund Labels

There are at least 225 different financial sector mutual funds and at least 632 mutual funds across ten sectors. Do investors need 63+ choices on average per sector? How different can the mutual funds be?

Those 225 financial sector mutual funds are very different. With anywhere from 22 to 523 holdings, many of these financial sector mutual funds have drastically different portfolios, creating drastically different investment implications.

The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first for stock selection. Energy ranks last. Details on the Best & Worst mutual funds in each sector are here.

A Recipe for Paralysis By Analysis

We firmly believe mutual funds for a given sector should not all be that different. We think the large number of Financials (or any other) sector mutual funds hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many mutual funds. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 523 stocks, and sometimes even more, for one mutual fund.

Any investor worth his salt recognizes that analyzing the holdings of a mutual fund is critical to finding the best mutual fund. Figure 1 shows our top rated mutual fund for each sector.

Figure 1: The Best Mutual Fund in Each Sector

Sources:   New Constructs, LLC and company filings

How to Avoid “The Danger Within”

Why do you need to know the holdings of mutual funds before you buy?