Warning Signs for Mutual Funds

If you’re invested in mutual funds, or are considering some, learn these red flags to watch out for:

• Underperformance: If the fund hasn’t beaten its benchmark index (such as the S&P 500 for stock funds focused on large companies) for a few years, consider selling. A bad year or two can happen, but persistent lagging is worrisome.

• Steep fees: If the fund’s fees are high or increasing, that’s a red flag. Favor no-load funds, because it’s often not worth surrendering a chunk of your investment at the outset.

• Growth in size: In general, the bigger a fund gets, the harder it will be for its managers to find great investments. A fund with $100 billion, for example, may have to spread its assets over so many holdings that most can’t move the needle very much.

• A change in focus: You may have bought into a mutual fund because it focused on, say, mid-cap companies — but over the years it shed many mid-caps and bought into large-caps. Similarly, a fund that used to seek undervalued companies may have since loaded up on not-soundervalued ones.

• A change in management: A managed mutual fund’s performance is tied closely to its managers. They’re the ones who study the universe of investments and decide which stocks, bonds or other securities are most promising for the fund. If a fund loses a manager who has delivered many years of strong performance, you might want to exit it as well, unless you have faith in the new manager.

• Lack of transparency: If fund managers’ letters to shareholders are not informative and don’t tackle issues of interest, or if they’re not candid and don’t inspire confidence, that’s suboptimal. If the fund stops referring to its managers by name, or is absorbed by a bigger fund, be on guard. You can research funds at

Morningstar.com. Also, read “Common Sense on Mutual Funds” by John C. Bogle (Wiley, $35).