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What Factors Affect Mutual Fund Performance?

By Luke Arthur
Updated Feb 26, 2024
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Mutual fund performance can be affected by many different factors, including the individual investments that are chosen by the mutual fund manager. The asset allocation of the fund also plays a big role in mutual fund performance. While it is generally not quoted as part of the performance, the fees that are charged by the mutual fund company also can affect the true performance of the fund.

A mutual fund is a type of investment vehicle that is managed by a professional money manager. This mutual fund manager is in charge of making the individual investment decisions for the fund. The manager will be in charge of researching all of the different investment options that are available and then choosing ones to purchase. If the manager chooses the right investments, the mutual fund performance will be positive. If the manager does not choose the right securities, it will have a negative impact on the performance of the mutual fund.

One of the jobs of the manager is to provide a diversified mutual fund portfolio for investors. This is accomplished by investing in multiple classes of assets such as stocks, bonds, and the money market. The asset allocation of a fund is vitally important to the performance, and it deals with how much money is allocated to each type of asset class.

When it comes to mutual fund performance, many investors underestimate the role of asset allocation. The fund manager is in charge of deciding on the percentages that will be allocated to each type of asset. For example, if the fund manager believes that the stock market will decline in value in the near future, he or she may decide to devote a larger percentage of the portfolio to bonds. If the stock market does decline, the manager will have made a big difference in the mutual fund performance by preserving the capital in the fund.

The fees of the mutual fund also play a role in the performance for investors. Every mutual fund typically charges an expense ratio that is taken out of the profits that are generated from trading. These fees cover the costs of running the fund and paying for the fund manager's salary. Since this is taken directly out of the profits from the fund, it has a negative impact on mutual fund performance. Investors can find out information about the operating expenses in the mutual fund prospectus.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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