How to Examine a Mutual Fund's Fundamentals - Price to Earnings, Price to Book, Dividend Yield & Expense Ratio

Just like how analysts like to measure a company's stock via the price to earnings ratio, price to book ratio, earnings per share growth, Beta, market capitalization & volume, dividend mutual funds can also be measured in the same manner.

i) Price to Earnings Ratio (P/E)

The price to earnings ratio of a mutual fund tells us how expensive this mutual fund is relative to the earnings of its holdings. Just like a stock's P/E ratio, this metric is important in determining the valuation of a mutual fund & its net asset value. A higher P/E ratio means the fund is more expensive while a lower P/E ratio might suggest the fund is undervalued or it is having problems earning money for investors. Historically, a price to earnings ratio greater than 15 suggests a mutual fund might be expensive while lower than that suggests it is cheaper.

ii) Price to Book Value (PB)

The Price to Book Value of a mutual fund examines the market capitalization of a fund's total assets (fair market value) versus total assets minus total liabilities the fund has. Book value is the price at which assets are carried on a company's balance sheet; likewise book value of a mutual fund is the book value of all net assets it owns. Sometimes the market prices mutual fund assets higher than its book value because of strong performance, earnings growth & so forth. Other times, when a mutual fund is doing not so great, investors will drive down the market value such that it is below the book value of net assets of the mutual fund. If this occurs, normally it indicates the fund is undervalued & a possible buying opportunity exists.

How do you find the price to earnings & price to book ratios of a mutual fund? The best source is Yahoo Finance! For instance, we visited the fundamentals of the Vanguard Dividend Growth mutual fund on http://finance.yahoo.com/q/hl?s=VDIGX+Holdings The fund has a price to earnings ratio of 13.55 & price to book ratio of 2.55 meaning the fund is priced at 2.55 times what its total net assets are worth (in accounting terms).

iii) Dividend Yield

The dividend yield is a financial ratio that shows how much a mutual fund pays out in cash payments to its investors each year relative to its share price. Investors looking for steady streams of income can take advantage of high yielding dividend stocks that provide 'bang for your buck' by paying you a cash payment just for holding the stock. As an example, if a stock pays 30 cents per share in annual dividends while its current stock price is $12, then the dividend yield is: 30 cents / $12 = 2.5%

iv) Mutual Fund Expense Ratio

A Mutual Fund Expense Ratio is the fund's total operating expenses expressed as a percentage of the fund's average net assets. This ratio is crucial to check before you buy a mutual fund as funds with higher expense ratios can eat in to your returns making the investment not worthwhile. You can read more on mutual fund expenses here.

So how do you find the dividend yield & expense ratio of a mutual fund? By visiting MorningStar.com! Below is a screenshot of MorningStar fundamentals look of the Vanguard Dividend Growth mutual fund. You can visit the link here http://quote.morningstar.com/fund/f.aspx?t=VDIGX