What is the right type of mutual fund for you? Theoretically, a mutual fund could contain any type of publicly traded market investment and sell you shares in it. But mutual funds typically are made up of shares of stocks, money market securities, REITs (real estate investment trusts), bonds or a combinations of these investment vehicles.
So how do you choose one that's right for you? As with choosing stocks, you have to take a look at your personal investment goals and your risk tolerance.
Many people think that buying shares in a mutual funds is automatically less risky than buying shares of individual stocks. But that is not necessarily true. Buying any security poses some amount of risk, which is why there are such lengthy written disclosures given to you before you spend your money.
Analyzing you investment goals involves knowing whether you want long term or short term growth, or ongoing dividend income. And you need to be able to accurately assess your risk tolerance. This is another way of asking how much you could afford to lose and how well could you handle the loss (if it happened) both financially and emotionally.
Once you have answered those questions, you need to do some research to find a mutual fund that makes it investments in the types of financial instruments that fits your investment goals and risk tolerance.
Stocks are not necessarily riskier than bonds. For example, a fund that invests in blue chip stocks with solid financial statements and long term performance would be more stable than a fund that invests heavily in C-grade bonds that have a high risk for default. So buying shares in a mutual fund doesn't let you off the hook when it comes to doing some research to make a smart decision.
Once you have decided on the type of securities you want in your fund, you will need to take a look at the fund managers. Think of it as if you were hiring an employee. (In fact, you are. But you don't have to pay the FICA taxes or health insurance!)
In fact, smart investors go one step further. They actually research to find the funds that the fund managers themselves are investing in. When the fund manager has a personal stake in the fund, there's a higher probability that he or she is watching it very carefully. A good example is Warren Buffet and his Berkshire Fund. Both Warren and his Fund have done extremely well over the years.
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Tuesday, March 31, 2009
Friday, March 27, 2009
Understanding the Basic Types of Mutual Funds
For the novice investor, mutual funds seem like a great investment vehicle. They offer managed investing, diversification, and SEC regulation. They are often the first place a financial advisor will send someone new to the stock market. But they come with their own complexities, which often get overlooked. Here we will attempt to demystify the different types of mutual funds and why one might choose that type as their investment medium.
The first and major type of mutual fund is the stock fund, also called an equity fund. These funds invest in shares of stock from various companies they deem to have benefit within the fund portfolio.
Growth Funds
Among the stock funds, the Growth fund is one of the most popular. This type of fund invests in growth stocks; stocks of companies who are developing new products and services, are in good financial order, and are expected to grow faster than other similar companies in the market.
Value Funds
Value funds, on the other hand, invest in companies that the fund managers feel are undervalued by the market. They may have had issues with management or a product, or maybe they are great companies but most investors haven't picked up on them yet. These funds make a profit when their companies improve in either profitability or popularity.
Index Funds
Funds that invest in the same companies as the major indexes are called Index Funds. They generally track along with the index they are targeting. One of the more popular index funds follows the S&P 500 index. An investor would choose this type of fund if they simply want to stay up with market performance, or they cannot decide which other type of fund to invest in.
Sector Funds
Sector funds focus on stocks of companies in a certain industry or market sector. For instance, you might fund sector funds that invest in just biotech, oil and gas, electronics, or banking. Performance of these funds is highly depending on how well that industry is doing. They are more vulnerable to changes in a certain market sector than other funds, but also allow for significant profit from a sector that is doing well.
International Funds
International Funds are just that - funds that invest in international companies. If you have heard there are some great opportunities oversees, maybe in China or India, this might be a fund for you. You purchase shares of these funds with U.S. dollars and the fund takes care of purchasing the various shares of stock in the currency of that country. This is an easy way to get access to emerging markets outside of the United States.
Other types of mutual funds are Bond funds, which consist of bonds from either U.S. Government, Corporate, Municipal or International entities. Total Return Funds combine the two types, investing in both stocks and bonds, to attemp to attain both income and appreciation. Finally, you can also invest in Money Market Funds, which invest in various short-term money market loans. You might choose a Money Market Fund if you want low-risk and are willing to settle for a modest gain.
Friday, March 20, 2009
The Best Index Funds
The best index funds are the ones with the lowest expense ratios. An S&P 500 market weighted index fund will always be same no matter where you choose to invest. Therefore, if you're looking for the best place to invest in index funds chose whatever company minimizes costs the most.
The theory why index funds can outperform active investment strategies is that you're minimizing costs and taxes. Therefore, by investing in index funds with high expense ratios you're defeating the purpose of passive investing.
Finding the best index fund families is pretty easy. Time and time again, 3 mutual fund families have provided the best index funds to their customers.
Vanguard - John Bogle, who created the first index found is the founder of Vanguard. Their strategy is simple, lower costs for investors, to provide the highest possible returns. The Vanguard 500 Index fund is the largest index fund in terms of invested money. Their minimum for opening an index fund, is $3,000.
Fidelity - Fidelity is another company that provides their investors with low cost index fund options. They have one of the largest selections of funds available out of any mutual fund company. Their minimum to invest in an index fund are $10,000.
T. Rowe Price - T. Rowe Price is another company that investor's can find low cost index fund. The advantage to investing in T. Rowe Price is their lower minimums. Currently their minimums are only $1,000 to invest in one of their index funds.
The easiest way to invest in these funds is directly with the fund families. That means signing up at their websites, and avoiding all third parties.
Investing with a third party means higher costs. Investing is a game of very small percentages. You need to maximize your chance for success in areas that you're able to. The only direct control you have over your funds is your expenses. All other variables are unpredictable.
Not only to your investments compound, but expenses to do. Even a $100, or a .1% higher expense ratio on an investment of $100,000 is a lost opportunity to invest. If you were to invest $100 for 30 years at a 10% rate of return, you would end up with $18,094 after 30 years! That same scenario with $500, or a .5% higher expense ratio on an investment of $100,000, costs you $90,471 in 30 years!
The theory why index funds can outperform active investment strategies is that you're minimizing costs and taxes. Therefore, by investing in index funds with high expense ratios you're defeating the purpose of passive investing.
Finding the best index fund families is pretty easy. Time and time again, 3 mutual fund families have provided the best index funds to their customers.
Vanguard - John Bogle, who created the first index found is the founder of Vanguard. Their strategy is simple, lower costs for investors, to provide the highest possible returns. The Vanguard 500 Index fund is the largest index fund in terms of invested money. Their minimum for opening an index fund, is $3,000.
Fidelity - Fidelity is another company that provides their investors with low cost index fund options. They have one of the largest selections of funds available out of any mutual fund company. Their minimum to invest in an index fund are $10,000.
T. Rowe Price - T. Rowe Price is another company that investor's can find low cost index fund. The advantage to investing in T. Rowe Price is their lower minimums. Currently their minimums are only $1,000 to invest in one of their index funds.
The easiest way to invest in these funds is directly with the fund families. That means signing up at their websites, and avoiding all third parties.
Investing with a third party means higher costs. Investing is a game of very small percentages. You need to maximize your chance for success in areas that you're able to. The only direct control you have over your funds is your expenses. All other variables are unpredictable.
Not only to your investments compound, but expenses to do. Even a $100, or a .1% higher expense ratio on an investment of $100,000 is a lost opportunity to invest. If you were to invest $100 for 30 years at a 10% rate of return, you would end up with $18,094 after 30 years! That same scenario with $500, or a .5% higher expense ratio on an investment of $100,000, costs you $90,471 in 30 years!
Monday, March 16, 2009
Choose the Best Performing Mutual Fund Company
Investing in mutual funds is a good way of handling your money. It is one way of saving for the future. There are lots of uncertainties ahead of you and its better to be prepared. Having investments is also the best mode of building wealth. Mutual fund investments can make you richer than what you are at the moment. Your money will be doubled, tripled or even go as high as you can never imagine. Unlike some regular investments like trading in securities, you will not directly handle your investments. A mutual fund is an investment company which do the trading for their investors.
Instead of you trading yourself, you will just have to invest money in funds. What the company will be doing is pool all the money coming from the investments. There is a fund manager who is in-charge in making investments. Actually, the investment will Actually, the investment will depend on the fund manager. If the manager has well-managed the fund, you will surely gain profits. But you don't have to worry about the fund manager. Probably you will doubt whether the fund manager is doing exactly what you are wishing for. Basically, fund managers are experts in the field. The company wouldn't want to jeopardize the investors' money.
They invest in stocks, money market instruments and other financial securities. It is your responsibility to research about the investment company you want to invest in. Make sure to go to a reputable investment company. Usually, there are write-ups on magazines about the best mutual funds around. You can even check on the net. Try to visit different company websites in order to compare their performance. The good thing in the investment is the diversification. You have the option to diversify your investment. You can invest in stocks and other securities. Mutual fund companies however make charges on your investments.
If you want high-risk investment, a higher fee is collected from you. Bear in mind that high risk investments doesn't necessarily mean high returns. For example, in the stock market, prices usually fluctuate on the daily basis. If you invest on a particular share, there is no assurance of an income. You can never tell whether the price will go up or down. You cannot blame the company if you cannot get any profit because stock prices are volatile. In investing you should know the types of mutual funds. There are three types: Class A, Class B and Class C.
Investing in Class A stock is advisable if you want to hold your investment for two years or more. On the other hand, Class B stocks are good if you want to hold the stocks for a longer period of time. While Class C stocks are the best option for short term investment. The value of your shares depends on the performance of your securities. There are lots of mutual fund companies available in the public. A great help in choosing the best performing company is to check rankings. Like for example Lipper Leader Fund RatingsLike for example Lipper Leader Fund Ratings which assesses mutual funds according to five criteria: total return, tax efficiency, expense, preservation and consistent return.
It's really your choice in the end that will matter. Just select the best mutual fund company which can contribute to your financial success.
Instead of you trading yourself, you will just have to invest money in funds. What the company will be doing is pool all the money coming from the investments. There is a fund manager who is in-charge in making investments. Actually, the investment will Actually, the investment will depend on the fund manager. If the manager has well-managed the fund, you will surely gain profits. But you don't have to worry about the fund manager. Probably you will doubt whether the fund manager is doing exactly what you are wishing for. Basically, fund managers are experts in the field. The company wouldn't want to jeopardize the investors' money.
They invest in stocks, money market instruments and other financial securities. It is your responsibility to research about the investment company you want to invest in. Make sure to go to a reputable investment company. Usually, there are write-ups on magazines about the best mutual funds around. You can even check on the net. Try to visit different company websites in order to compare their performance. The good thing in the investment is the diversification. You have the option to diversify your investment. You can invest in stocks and other securities. Mutual fund companies however make charges on your investments.
If you want high-risk investment, a higher fee is collected from you. Bear in mind that high risk investments doesn't necessarily mean high returns. For example, in the stock market, prices usually fluctuate on the daily basis. If you invest on a particular share, there is no assurance of an income. You can never tell whether the price will go up or down. You cannot blame the company if you cannot get any profit because stock prices are volatile. In investing you should know the types of mutual funds. There are three types: Class A, Class B and Class C.
Investing in Class A stock is advisable if you want to hold your investment for two years or more. On the other hand, Class B stocks are good if you want to hold the stocks for a longer period of time. While Class C stocks are the best option for short term investment. The value of your shares depends on the performance of your securities. There are lots of mutual fund companies available in the public. A great help in choosing the best performing company is to check rankings. Like for example Lipper Leader Fund RatingsLike for example Lipper Leader Fund Ratings which assesses mutual funds according to five criteria: total return, tax efficiency, expense, preservation and consistent return.
It's really your choice in the end that will matter. Just select the best mutual fund company which can contribute to your financial success.
Friday, March 13, 2009
Mutual Funds - A Potent But Cautious Tool
Mutual funds have become a potent investment option in the current fluctuating market scenario. Let us discuss why mutual funds have become one of the better bets in investment today.
Mutual funds are managed by expert Fund Managers and hence are in safer hands. An individual novice cannot make a kill in the equity or money market as the said investor may lack the proper expertise to do so. Even in the presence of proper expertise, time is a major factor in managing an individual portfolio. So it's better to leave them in expert funds.
The ideal way to invest in mutual funds in a fluctuating market is SIP or Systematic Investment Plan as it helps an individual to take advantage of the principle of Rupee Cost Averaging. So instead of putting money in lump sum, an SIP is surely a better bet.
There are different types of Mutual Funds available. By nature of lock in period they can be classified to be Open Ended and Close Ended. Open Ended Funds have no lock in period while Close Ended Funds do have.
By asset allocation they can further be classified as Equity, Debt and Gilt Funds. Equity funds invest directly in equities while Debt and Gilt Funds invest in money market instruments and corporate bonds respectively.
Among Equity Funds, there are special sectoral funds like Real Estate, Pharma, Infrastructure etc. But a Diversified Equity Fund is a better bet as it allocates funds to all sectors and doesn't comprehensively bank on a particular sector.
One can invest in the appreciation option of a fund where the NAV gets increased or the dividend payout or dividend reinvestment option. In the former, dividend is given directly to the investor while in the later the same accrued dividend is used to purchase additional units of the said fund on behalf of the investor.
Fund houses do charge an entry or exit load for investing in mutual funds but if the same investment is done directly through the fund house instead through a broker, the said fees are generally waived. The load is charged to pay for the brokerage of the dealers and distributors in general. Fund houses also offer options of switching over to different options of a same fund or moving over to an entirely different fund of the same fund house.
Thus in general Mutual Funds are a great way of investment as it allows you to buy quality equity or money market instruments with even very small amounts of money. It is in general a careful, planned and judicious approach of investing for a long to medium term to fulfill the financial goals of life.
Mutual funds are managed by expert Fund Managers and hence are in safer hands. An individual novice cannot make a kill in the equity or money market as the said investor may lack the proper expertise to do so. Even in the presence of proper expertise, time is a major factor in managing an individual portfolio. So it's better to leave them in expert funds.
The ideal way to invest in mutual funds in a fluctuating market is SIP or Systematic Investment Plan as it helps an individual to take advantage of the principle of Rupee Cost Averaging. So instead of putting money in lump sum, an SIP is surely a better bet.
There are different types of Mutual Funds available. By nature of lock in period they can be classified to be Open Ended and Close Ended. Open Ended Funds have no lock in period while Close Ended Funds do have.
By asset allocation they can further be classified as Equity, Debt and Gilt Funds. Equity funds invest directly in equities while Debt and Gilt Funds invest in money market instruments and corporate bonds respectively.
Among Equity Funds, there are special sectoral funds like Real Estate, Pharma, Infrastructure etc. But a Diversified Equity Fund is a better bet as it allocates funds to all sectors and doesn't comprehensively bank on a particular sector.
One can invest in the appreciation option of a fund where the NAV gets increased or the dividend payout or dividend reinvestment option. In the former, dividend is given directly to the investor while in the later the same accrued dividend is used to purchase additional units of the said fund on behalf of the investor.
Fund houses do charge an entry or exit load for investing in mutual funds but if the same investment is done directly through the fund house instead through a broker, the said fees are generally waived. The load is charged to pay for the brokerage of the dealers and distributors in general. Fund houses also offer options of switching over to different options of a same fund or moving over to an entirely different fund of the same fund house.
Thus in general Mutual Funds are a great way of investment as it allows you to buy quality equity or money market instruments with even very small amounts of money. It is in general a careful, planned and judicious approach of investing for a long to medium term to fulfill the financial goals of life.
Thursday, March 12, 2009
Mutual Funds Investment Can Give You Big Returns
People are more careful with their money these days. They are more interested in storing money for the rainy days. They prefer to have it in liquid form so they can pull out their money when they want to and most especially when they need to. Although there are still some people who prefer to invest their money because the return of investment is quite large if compared to the interest given by banks.
The easiest form of investment is Mutual Funds Investment. It is best to make use of a mutual fund calculator so computation of interest will be easier on you. Investors who are into Mutual Funds make use of them. It is widely available online. Although there would still be a certain amount of risk. To minimize the risk involved, study past performance of the fund that you are interested in because chances are, past performance will be able to predict or at the very least give you an idea on how it will turn out. The saying, "past behavior predicts future performance", is applicable in this scenario. Always learn the risks involved. If it is somehow makes you uncomfortable, stop and think about investing. We should be careful in handling money, especially in this day and age. We do not want to end up with a lot of regrets and a lot of debts.
For the first time investors, it will take a lot of hard work and studying to know the ins and outs of investing. But it will get easier every time. Don't worry because sooner or later, you will get the hang of it. Who knows, you might be the one who will be giving us tips on proper investing in the future.
The easiest form of investment is Mutual Funds Investment. It is best to make use of a mutual fund calculator so computation of interest will be easier on you. Investors who are into Mutual Funds make use of them. It is widely available online. Although there would still be a certain amount of risk. To minimize the risk involved, study past performance of the fund that you are interested in because chances are, past performance will be able to predict or at the very least give you an idea on how it will turn out. The saying, "past behavior predicts future performance", is applicable in this scenario. Always learn the risks involved. If it is somehow makes you uncomfortable, stop and think about investing. We should be careful in handling money, especially in this day and age. We do not want to end up with a lot of regrets and a lot of debts.
For the first time investors, it will take a lot of hard work and studying to know the ins and outs of investing. But it will get easier every time. Don't worry because sooner or later, you will get the hang of it. Who knows, you might be the one who will be giving us tips on proper investing in the future.
Wednesday, March 11, 2009
Stock Market Tips - Are Mutual Funds Really Mutually Beneficial?
Mutual funds are one of the most popular investment vehicles in America. So popular that there are well over 10,000 available to choose from! Most articles focus on picking a fund but I'm going to ask a completely different question. Are the benefits of mutual funds mutually beneficial?
What is a fund?
To start let's define what a mutual fund is for those readers who may be a little unsure. A mutual fund is an account (called a fund) where many people pool their money for the purpose of investing. Imagine you want to buy a McDonald's franchise. However the cost of opening this store is going to be almost $2 million. You do not have that much money so you look for partners. Eventually there are 5 partners, each splitting the $2 million startup investment. Then 4 years later the 5 of you decide to sell. You sell the complete business for $10 million and divide the profits 5 ways. That would be a partnership. And yet it's also a good picture of how a mutual fund works.
A mutual fund is a bunch of people who become small partners. They pay in their investment and then someone else runs the business - in this case a stock portfolio. However there are some partners who don't pay in. In fact they get paid to not pay in. They are the fund managers and all the people involved in the business. And that's where the mutual benefits break down.
The inequality comes in the form of SEC rules. According to SEC rules a mutual fund can only buy stock, hold it, and sell it later. That means a mutual fund can only make money when the stock market goes higher. The plan of the fund manager is to buy low, and sell high. Unfortunately the stock market does not always go up (just look at the October 2008 market crash). So inevitably the fund's value will go up and down. At the end of the year investors are hoping generally for an annual return, or growth, of about 15-20%.
This description may not sound bad to you. That's because you have probably adjusted to this treatment and assume it is "the rules of the game". After all this is how you have been programmed to respond. But what you may not know is what happens behind the scenes.
It may not be legal for a mutual fund to trade your MONEY during a down market, but they CAN trade the fund's assets. And they do. And they make bank. In fact the trading behavior of institutional investors is so predictable an entire segment of stock market analysts spend their time watching behavior of institutions and trading off of that behavior.
What Are They Doing With Your Money?
So what exactly are they doing with your stocks? Most they are doing one of two things. They are:
Lending your stocks to Short Sellers. When an institution has a fund full of stock shares those shares are available to be lent out. And believe me, they do. When it looks like a stock is going down they lend your stock to people who want to sell it without owning it. These people are known as short sellers. When they lend these stocks you know of course they make profit. In and of itself lending stock to short sellers is not a problem. The unfair part is the fact that the institution alone, and not the fund investors, benefit from this little dealing. So the fund manager is lending your stock, and making money, while you sit at home wondering why your portfolio is getting smaller and smaller.
Write Options against it. The second thing funds may do is to write options against your stock. They really don't even care how it pans out. Worst case scenario for the fund is they sell your stock for less than they meant. So long as the people make a little profit the fund doesn't care if the people don't make as much as they could. And what about the option? Well they make money on that too. Usually 10-20% per month. That's right, you are settling for 20% each year, while the people managing your mutual fund are making 20% each month with the stock you bought. Again, the practice they are doing is fine - but it's not fair that they make the money and do not share in the profit.
There is however a way you can profit from the same tricks traditionally held for fund managers. You simply learn the same strategies and techniques and do them on your own, without a fund manager. Not only are these strategies legal, they are done every day by millions of Americans. The difference in you and them is simply a little education.
What is a fund?
To start let's define what a mutual fund is for those readers who may be a little unsure. A mutual fund is an account (called a fund) where many people pool their money for the purpose of investing. Imagine you want to buy a McDonald's franchise. However the cost of opening this store is going to be almost $2 million. You do not have that much money so you look for partners. Eventually there are 5 partners, each splitting the $2 million startup investment. Then 4 years later the 5 of you decide to sell. You sell the complete business for $10 million and divide the profits 5 ways. That would be a partnership. And yet it's also a good picture of how a mutual fund works.
A mutual fund is a bunch of people who become small partners. They pay in their investment and then someone else runs the business - in this case a stock portfolio. However there are some partners who don't pay in. In fact they get paid to not pay in. They are the fund managers and all the people involved in the business. And that's where the mutual benefits break down.
The inequality comes in the form of SEC rules. According to SEC rules a mutual fund can only buy stock, hold it, and sell it later. That means a mutual fund can only make money when the stock market goes higher. The plan of the fund manager is to buy low, and sell high. Unfortunately the stock market does not always go up (just look at the October 2008 market crash). So inevitably the fund's value will go up and down. At the end of the year investors are hoping generally for an annual return, or growth, of about 15-20%.
This description may not sound bad to you. That's because you have probably adjusted to this treatment and assume it is "the rules of the game". After all this is how you have been programmed to respond. But what you may not know is what happens behind the scenes.
It may not be legal for a mutual fund to trade your MONEY during a down market, but they CAN trade the fund's assets. And they do. And they make bank. In fact the trading behavior of institutional investors is so predictable an entire segment of stock market analysts spend their time watching behavior of institutions and trading off of that behavior.
What Are They Doing With Your Money?
So what exactly are they doing with your stocks? Most they are doing one of two things. They are:
Lending your stocks to Short Sellers. When an institution has a fund full of stock shares those shares are available to be lent out. And believe me, they do. When it looks like a stock is going down they lend your stock to people who want to sell it without owning it. These people are known as short sellers. When they lend these stocks you know of course they make profit. In and of itself lending stock to short sellers is not a problem. The unfair part is the fact that the institution alone, and not the fund investors, benefit from this little dealing. So the fund manager is lending your stock, and making money, while you sit at home wondering why your portfolio is getting smaller and smaller.
Write Options against it. The second thing funds may do is to write options against your stock. They really don't even care how it pans out. Worst case scenario for the fund is they sell your stock for less than they meant. So long as the people make a little profit the fund doesn't care if the people don't make as much as they could. And what about the option? Well they make money on that too. Usually 10-20% per month. That's right, you are settling for 20% each year, while the people managing your mutual fund are making 20% each month with the stock you bought. Again, the practice they are doing is fine - but it's not fair that they make the money and do not share in the profit.
There is however a way you can profit from the same tricks traditionally held for fund managers. You simply learn the same strategies and techniques and do them on your own, without a fund manager. Not only are these strategies legal, they are done every day by millions of Americans. The difference in you and them is simply a little education.
Friday, March 6, 2009
Investing 101 - Index Funds
Mutual funds are without a doubt the most significant invention of the 20th century as far as the small individual investor of modest means is concerned. Thanks to these mutual funds, the benefits of the international capital markets can now accrue to the vast majority of the population and now just the wealthy elite. A special type of mutual fund, called an index fund, represents an important evolution of the mutual fund model, allowing small investors to benefit even more than before.
What Is An Index Fund?
An index fund is merely a mutual fund that seeks to track the performance of a broad market index such as the S&P 500 or EAFE. Unlike traditional mutual funds, an index fund doesn't attempt to outperform the market by making shrewd purchase and sell decisions. Why not? Because as it turns out, most traditional mutual funds fail in their goals to beat the market. As a whole, index funds tend to outperform most non-index mutual funds for a variety of reasons.
Why Do Index Funds Outperform?
The main reason index funds tend to outperform traditional mutual funds over the long term is their very low cost, expressed as a low expense ratio. Since an indexing strategy doesn't need an expensive manager and cadre of research analysts, these funds have an immediate cost advantage of 0.5%, 1%, or more over other funds. As it turns out, a 1% head start is nearly insurmountable in the world of investing: sure, some will manage it but how do you know which ones in advance?
Where To Buy Mutual Funds?
Most of the large fund companies now sell index funds, but not all are created equal. For my money, I consider Vanguard to be the best of the best when it comes to index funds. Vanguard is inexpensive, customer-focused, very easy to deal with, and doesn't charge any transaction or brokerage fees. In fact, you could make a good argument that Vanguard is the only company you need use at all.
What Is An Index Fund?
An index fund is merely a mutual fund that seeks to track the performance of a broad market index such as the S&P 500 or EAFE. Unlike traditional mutual funds, an index fund doesn't attempt to outperform the market by making shrewd purchase and sell decisions. Why not? Because as it turns out, most traditional mutual funds fail in their goals to beat the market. As a whole, index funds tend to outperform most non-index mutual funds for a variety of reasons.
Why Do Index Funds Outperform?
The main reason index funds tend to outperform traditional mutual funds over the long term is their very low cost, expressed as a low expense ratio. Since an indexing strategy doesn't need an expensive manager and cadre of research analysts, these funds have an immediate cost advantage of 0.5%, 1%, or more over other funds. As it turns out, a 1% head start is nearly insurmountable in the world of investing: sure, some will manage it but how do you know which ones in advance?
Where To Buy Mutual Funds?
Most of the large fund companies now sell index funds, but not all are created equal. For my money, I consider Vanguard to be the best of the best when it comes to index funds. Vanguard is inexpensive, customer-focused, very easy to deal with, and doesn't charge any transaction or brokerage fees. In fact, you could make a good argument that Vanguard is the only company you need use at all.
Mutual Funds Vs Stocks
No two things can ever be exactly the same. There is always at least something that one object has that's different from another, no matter how similar they may be. Even identical twins differences between them, it's just that they aren't that noticeable at first glance. Anyways, some people out there wonder what the difference between stocks and mutual funds are, and would love to see a comparison between the two. That's why I've taken the liberty of writing this article, for the benefit of those who do have no idea what they are - interested in knowing what they are? Read this: what really makes them "unique" as compared to one another is the kind of investments you put your money into.
When you say stocks, it usually means that you're putting it in a singular type of investment only. But with mutual funds, you're putting it in several kinds, which include a variety of the following: bonds, stocks, and many other money-market investments. That brings up the 2nd fact that separates them from one another, which is the risk involved. Investing in mutual funds means that you'll be taking a lower risk as compared to stocks, why? Because of the diversification of this particular investment - it just doesn't stick to one type, but to many. With stocks, expect that you'll be taking higher risks because it isn't that diversified.
Having said that, it brings up the 3rd fact that differentiates the two, which is: returns. In the stock market, there's "belief" or "law" that's "implemented" here, which goes: the higher the risk, the higher the return. What that means, when applying it for the sake of distinguishing the two mentioned, stocks do tend to fluctuate higher, which could mean larger returns. The 4th deviation between the two types of investment is the "management" their placed under. With mutual funds, your investment is placed under the careful care of professional investment managers. These are the guys making the decisions on your behalf, but do so by investing in "medians" that'll most likely make a profit.
That in turn lowers the risk you take, not to mention the burden of deciding where to put your cash. Stocks, on the other hand, don't come with a team of professionals to watch over your investment; you only have yourself to rely on. That can be very risky if you're new to this kinda business, and lead you into the pits of financial ruin too. 5th and last difference is efficiency - mutual funds have larger sums of money to invest with, usually come hand-in-hand trade-commission free, not to mention the contacts they have at the brokerage, which makes them more efficient.
Now I ask you this: which of the two would you invest in? Well that depends entirely on you, my furry friend. Being a newbie to a place as wild as the money market can be risky given that you don't know how things works yet, so it'd be best if you'd pool your money in mutual funds. As you make your way up the "ladder", you might wanna consider placing your cash in individual stocks, which can mean more profit for you, taken that you've gained enough experience. Or you could try investing in both, if you'd like.
When you say stocks, it usually means that you're putting it in a singular type of investment only. But with mutual funds, you're putting it in several kinds, which include a variety of the following: bonds, stocks, and many other money-market investments. That brings up the 2nd fact that separates them from one another, which is the risk involved. Investing in mutual funds means that you'll be taking a lower risk as compared to stocks, why? Because of the diversification of this particular investment - it just doesn't stick to one type, but to many. With stocks, expect that you'll be taking higher risks because it isn't that diversified.
Having said that, it brings up the 3rd fact that differentiates the two, which is: returns. In the stock market, there's "belief" or "law" that's "implemented" here, which goes: the higher the risk, the higher the return. What that means, when applying it for the sake of distinguishing the two mentioned, stocks do tend to fluctuate higher, which could mean larger returns. The 4th deviation between the two types of investment is the "management" their placed under. With mutual funds, your investment is placed under the careful care of professional investment managers. These are the guys making the decisions on your behalf, but do so by investing in "medians" that'll most likely make a profit.
That in turn lowers the risk you take, not to mention the burden of deciding where to put your cash. Stocks, on the other hand, don't come with a team of professionals to watch over your investment; you only have yourself to rely on. That can be very risky if you're new to this kinda business, and lead you into the pits of financial ruin too. 5th and last difference is efficiency - mutual funds have larger sums of money to invest with, usually come hand-in-hand trade-commission free, not to mention the contacts they have at the brokerage, which makes them more efficient.
Now I ask you this: which of the two would you invest in? Well that depends entirely on you, my furry friend. Being a newbie to a place as wild as the money market can be risky given that you don't know how things works yet, so it'd be best if you'd pool your money in mutual funds. As you make your way up the "ladder", you might wanna consider placing your cash in individual stocks, which can mean more profit for you, taken that you've gained enough experience. Or you could try investing in both, if you'd like.
Wednesday, March 4, 2009
Mutual Fund Investment Advice
First off, why should you invest in mutual funds? Mutual funds are helpful for those who have limited time and resources, and would prefer to leave the management of their money to someone else. Mutual fund managers offer the expertise to invest in highly specialized areas such as international equities, and may thus be attractive if you would like to gain exposure to these markets without having to do the legwork yourself.
With such a wide array of mutual funds, choosing among them can be difficult. Nonetheless, there are three major criteria you should use to evaluate any mutual fund: the mutual fund's investment objectives, investment track record, and the mutual fund's expenses.
Mutual Fund Objectives
Choose mutual funds based on whether you are comfortable with their investment objectives. Different mutual funds have different investment objectives: growth, value, income, international exposure, contrarian investing. These will dictate the type of strategies followed by the fund - are the fund managers value investors? Or do they invest primarily for growth? Other funds adopt a strictly contrarian approach.
Extreme investment objectives naturally lead to more risky investment strategies - these are specifically the type of mutual funds you should be careful about investing in.
One indicator you should become familiar with is the Sharpe ratio. The Sharpe Ratio compares performance to fund volatility and is a good measure of risk. The lower the ratio, the better. The Sharpe Ratio is a very important measure of the level of risk you would expose yourself to.
Mutual Fund Performance
While past performance does not necessarily imply future success, it is nonetheless an important indicator. Compare the mutual fund's performance to the overall market and sector performance. Note that more than 70 percent of all mutual funds underperform, so scrutinize the performance figures carefully. What is the time span, what did the fund compare itself against, and what is the mode of comparison?
Mutual Fund Expenses The third major factor you should carefully evaluate is the mutual fund's expenses. Look at the expense ratio. This ratio sums up all the costs of investing in the fund, which typically include the management costs, 12-b-1-, operating costs, loads and other miscellaneous costs.
For specific information on each mutual fund and to retrieve the different ratios mentioned above, Yahoo Finance and Morningstar are my personal favorites.
With such a wide array of mutual funds, choosing among them can be difficult. Nonetheless, there are three major criteria you should use to evaluate any mutual fund: the mutual fund's investment objectives, investment track record, and the mutual fund's expenses.
Mutual Fund Objectives
Choose mutual funds based on whether you are comfortable with their investment objectives. Different mutual funds have different investment objectives: growth, value, income, international exposure, contrarian investing. These will dictate the type of strategies followed by the fund - are the fund managers value investors? Or do they invest primarily for growth? Other funds adopt a strictly contrarian approach.
Extreme investment objectives naturally lead to more risky investment strategies - these are specifically the type of mutual funds you should be careful about investing in.
One indicator you should become familiar with is the Sharpe ratio. The Sharpe Ratio compares performance to fund volatility and is a good measure of risk. The lower the ratio, the better. The Sharpe Ratio is a very important measure of the level of risk you would expose yourself to.
Mutual Fund Performance
While past performance does not necessarily imply future success, it is nonetheless an important indicator. Compare the mutual fund's performance to the overall market and sector performance. Note that more than 70 percent of all mutual funds underperform, so scrutinize the performance figures carefully. What is the time span, what did the fund compare itself against, and what is the mode of comparison?
Mutual Fund Expenses The third major factor you should carefully evaluate is the mutual fund's expenses. Look at the expense ratio. This ratio sums up all the costs of investing in the fund, which typically include the management costs, 12-b-1-, operating costs, loads and other miscellaneous costs.
For specific information on each mutual fund and to retrieve the different ratios mentioned above, Yahoo Finance and Morningstar are my personal favorites.
Tuesday, March 3, 2009
Mutual Funds - A Secure Investment
Mutual funds are a collection of stocks and/or bonds invested in different securities, which include fixed market securities and money market instrumentals. It facilitates investors to put their money under an efficient investment management. There are three types of mutual funds namely, income funds, growth funds, and balanced funds.
The basic principle underlying mutual funds is to pool in money with other people to convert it into funds. Mutual funds generally buy shares in stocks wherein an experienced fund manager performs the task of selecting, purchasing and selling off the stocks himself. Certificates are then issued to the shareholders as a testimony of proof of their partnership and participation in the emoluments of funds.
There are particularly three ways in which you can make money from a mutual fund. They are:
1. Benefits can be earned from the commission on stocks, and interests on bonds. All the income received all round the year is paid by the funds in the form of a distribution.
2. The fund will have an outstanding benefit provided the funds sell high priced securities. Most of the profits are given back to the investors in a distribution.
3. The value of the fund’s share automatically increases with an increase in the value of unsold high priced fund holdings. Accordingly, you can always sell shares of your mutual fund for profits.
Many people find investing in mutual funds an attractive option to that of dealing directly with the stock market because it is comparatively safe. In fact, these days, mutual funds have become the first preference of many investors. Mutual funds provide a balanced and better approach compared to conventional stock market alternatives. It has an added advantage of investing in several distinct sectors and firms, so, if one company suffers losses, the others may be rising. Investing in mutual funds, therefore, minimizes the loss-bearing risk of monetary assets.
In a nutshell, here are the salient points of the advantages of mutual funds:
1. Cost-effectiveness of investing in mutual funds: The main advantage of investing in mutual funds is the efficient management of your finances. Investors buy funds because they lack the competence and time to manage their own portfolio. It is a cost effective method, especially for a small investor because it is expensive to get a manager to manage individual investments.
2. Diversification: Compared to individual stocks or bonds, mutual funds diversify the risk of bearing loss. The basic intention being to invest in a diverse number of assets in order to overcome the negatives of loss making stocks or bonds by the profits reaped by others.
3. Economy of Scale: The transaction expenses are relatively low as a mutual fund is bought and sold in large amounts of credits.
4. Liquidity: Mutual funds provide the opportunity of converting shares into cash at any point of time.
5. Simplicity: It is easy to buy a mutual fund. Most companies have their own automatic purchase plans, and the minimum investment rates are very small.
Therefore, investing in mutual funds is certainly a secure investment as the chance of loss is spread out, and the opportunity for gains are numerous. At the same time, it is both cost-effective and an investment that gives great future returns.
The days of depending on government largesse in meeting old age financial requirements are growing dimmer by the day. Hence, investing in mutual funds can be a wise choice, especially for those who plan for an early retirement and hope to enjoy a secure senior citizenship.
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