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return since inception. Always remember that these figures are historical; that is, they reflect the fund's past performance. There are never any guarantees that the fund would continue to perform at the same rate in the future. However, a fund's historical performance is the best tool available to size up the fund as a potential investment, and it could also indicate whether the fund has been delivering consistent returns year after year in order to establish credibility.

Also note that the performance figures, while include the fund's expense ratio, usually do not include other important items such as sales loads, transaction fees, broker commissions, and the all-important taxes. Many investors neglect to consider these items while evaluating a fund's performance. They could have a material effect on what your actual final return would be. Even if your fund delivers the 25% gross return (which is, by the way, a decent return), your net return may end up being much less when you consider these extra cost items.

Tax Considerations

In our discussion of various types of securities, we gave some consideration to the topic of taxes. If there is any money to be made in any way, at some point you are going to have to let the IRS in on it as well. There is no escaping it. Mutual funds are no exceptions, but by nature dealing with taxes on returns from mutual funds could get a bit trickier than that of other types of investments, and there are also tax pitfalls that you should be aware of before you buy into a fund. If you are used to dealing with stocks, you know that paying taxes on capital gains resulting from a stock trade is pretty straightforward. You are simply going to get hit with a capital gains tax on your earnings. Granted that the tax rate on capital gains may vary depending on the length of time that you have held a stock, but that does not complicate matters by much. Of course, as long as you keep your stock, there are no …