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How do I compare different funds?

While past performance does not guarantee future growth, annualized returns (e.g. one-year, three-year, five-year) are often used to compare funds and the quality of their management. Most major daily newspapers publish mutual funds performance tables each month for periods ranging from one month to 10 years or more.

Comparing a fund with others in its peer group is a good way to evaluate performance. Mutual fund tables make it easy by grouping similar funds together and including averages for each category. The ability to consistently outperform its peers is one sign of a good-quality fund.

To make a fair comparison, it is important to recognize that all funds in one category are not the same. For example, some Canadian equity funds are managed conservatively, while others aggressively pursue growth. One fund manager may emphasize longer-term value, while another may actively trade positions at different times in the market cycle. If in doubt, find out from the fund company or the prospectus what the fund's investment objectives are and how the fund is managed. While some performance numbers can be very attractive, you may discover that the fund's investments are too risky for you.

The same holds true for funds in different categories. Money market funds will generally have lower returns than growth funds, but there is minimal risk to your investment in a money market fund.

 

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