One of the most common ways to choose a mutual fund is to follow the crowd and invest in the "hot" funds of the moment. Unfortunately, it's a bad idea to jump from one winning fund to another. Most of the time, the mutual funds that everyone is interested in have done well recently and get most of the new sales.
As a whole, investors are putting most of their new money into a small number of mutual funds and even fewer mutual fund companies. Investors have put more than $400 billion into the 2843 different mutual funds, but one-third of that money is in only 50 funds, and half of it is in the 100 largest funds.
Following the market leaders can be a good idea. Larger mutual fund companies and funds are able to cut costs and attract the best professional money managers because of their size. But the biggest problem is that a mutual fund that is selling well today might not be a winner tomorrow. This is true for all mutual funds, but the one that sells the most shares and gets the most attention seems to have the most trouble with it.
So buying the stock fund that was the best-seller yesterday is not a good way to make money. You don't have to completely ignore these hot funds, but you should know what they're good at and what they can't do. They became best-selling funds because they have good ideas, but you can only use those good ideas if you have a well-balanced portfolio and not just follow what everyone else is doing.
