MUTUAL FUNDS A WONDERFUL WAY TO INVEST YOUR MONY...
MUTUAL FUNDS
The Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can
think of a mutual fund as a company that brings together a group of people and
invests their money in stocks, bonds, and other securities. Each investor owns shares,
which represent a portion of the holdings of the fund.
You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A fund pays out
nearly all of the income it receives over the year to fund owners in the form of a
distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain.
Most funds also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for distributions or
to reinvest the earnings and get more shares.
The Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can
think of a mutual fund as a company that brings together a group of people and
invests their money in stocks, bonds, and other securities. Each investor owns shares,
which represent a portion of the holdings of the fund.
You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A fund pays out
nearly all of the income it receives over the year to fund owners in the form of a
distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain.
Most funds also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for distributions or
to reinvest the earnings and get more shares.
Advantages of Mutual Funds:
• Professional Management - The primary advantage of funds (at least theoretically) is the professional
management of your money. Investors purchase funds because they do not have the time or the
expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small
investor to get a full-time manager to make and monitor investments.
• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your
risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in
any particular investment is minimized by gains in others. In other words, the more stocks and bonds you
own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own
hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build
this kind of a portfolio with a small amount of money.
• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its
transaction costs are lower than what an individual would pay for securities transactions.
• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be
converted into cash at any time.
• Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and
the minimum investment is small. Most companies also have automatic purchase plans whereby as little
as $100 can be invested on a monthly basis.
• Professional Management - The primary advantage of funds (at least theoretically) is the professional
management of your money. Investors purchase funds because they do not have the time or the
expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small
investor to get a full-time manager to make and monitor investments.
• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your
risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in
any particular investment is minimized by gains in others. In other words, the more stocks and bonds you
own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own
hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build
this kind of a portfolio with a small amount of money.
• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its
transaction costs are lower than what an individual would pay for securities transactions.
• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be
converted into cash at any time.
• Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and
the minimum investment is small. Most companies also have automatic purchase plans whereby as little
as $100 can be invested on a monthly basis.
Disadvantages of Mutual Funds:
• Professional Management - Did you notice how we qualified the advantage of professional management
with the word "theoretically"? Many investors debate whether or not the so-called professionals are any
better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses
money, the manager still takes his/her cut. We'll talk about this in detail in a later section.
• Costs - Mutual funds don't exist solely to make your life easier - all funds are in it for a profit. The mutual
fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this
tutorial we have devoted an entire section to the subject.
• Dilution - It's possible to have too much diversification. Because funds have small holdings in so many
different companies, high returns from a few investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big. When money pours into funds that
have had strong success, the manager often has trouble finding a good investment for all the new money.
• Taxes - When making decisions about your money, fund managers don't consider your personal tax
situation. For example, when a fund manager sells a security, a capital-gains tax is triggered, which affects
how profitable the individual is from the sale. It might have been more advantageous for the individual to
defer the capital gains liability.
• Professional Management - Did you notice how we qualified the advantage of professional management
with the word "theoretically"? Many investors debate whether or not the so-called professionals are any
better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses
money, the manager still takes his/her cut. We'll talk about this in detail in a later section.
• Costs - Mutual funds don't exist solely to make your life easier - all funds are in it for a profit. The mutual
fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this
tutorial we have devoted an entire section to the subject.
• Dilution - It's possible to have too much diversification. Because funds have small holdings in so many
different companies, high returns from a few investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big. When money pours into funds that
have had strong success, the manager often has trouble finding a good investment for all the new money.
• Taxes - When making decisions about your money, fund managers don't consider your personal tax
situation. For example, when a fund manager sells a security, a capital-gains tax is triggered, which affects
how profitable the individual is from the sale. It might have been more advantageous for the individual to
defer the capital gains liability.
DIFFERENT TYPES OF FUNDS
No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North America! That means
there are more mutual funds than stocks.
It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than
others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.
Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual
funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in
companies of the same sector or region are known as specialty funds.
Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.
Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your
principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).
Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are
synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a
steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees.
Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond
funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities.
Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.
Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and
equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.
A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any
asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.
Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are,
however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which
is below.
No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North America! That means
there are more mutual funds than stocks.
It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than
others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.
Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual
funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in
companies of the same sector or region are known as specialty funds.
Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.
Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your
principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).
Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are
synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a
steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees.
Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond
funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities.
Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.
Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and
equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.
A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any
asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.
Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are,
however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which
is below.
Buying and Selling mutual funds
You can buy some mutual funds (no-load) by contacting the fund companies
directly. Other funds are sold through brokers, banks, financial planners, or insurance
agents. If you buy through a third party there is a good chance they'll hit you with a
sales charge (load).
That being said, more and more funds can be purchased through no-transaction fee
programs that offer funds of many companies. Sometimes referred to as a "fund
supermarket," this service lets you consolidate your holdings and record keeping, and
it still allows you to buy funds without sales charges from many different companies.
Popular examples are Schwab's OneSource, Vanguard's FundAccess, and Fidelity's
FundsNetwork. Many large brokerages have similar offerings.
Selling a fund is as easy as purchasing one. All mutual funds will redeem (buy back)
your shares on any business day. In the United States, companies must send you the
payment within seven days.
The Value of Your Fund
Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a
mutual fund. NAV per share is the value of one share in the mutual fund, and it is the
number that is quoted in newspapers. You can basically just think of NAV per share as
the price of a mutual fund. It fluctuates everyday as fund holdings and shares
outstanding change.
When you buy shares, you pay the current NAV per share plus any sales front-end
load. When you sell your shares, the fund will pay you NAV less any back-end load.
Finding Funds
The Mutual Fund Education Alliance™ is the not-for-profit trade association of the
no-load mutual fund industry. They have a tool for searching for no-load funds
You can buy some mutual funds (no-load) by contacting the fund companies
directly. Other funds are sold through brokers, banks, financial planners, or insurance
agents. If you buy through a third party there is a good chance they'll hit you with a
sales charge (load).
That being said, more and more funds can be purchased through no-transaction fee
programs that offer funds of many companies. Sometimes referred to as a "fund
supermarket," this service lets you consolidate your holdings and record keeping, and
it still allows you to buy funds without sales charges from many different companies.
Popular examples are Schwab's OneSource, Vanguard's FundAccess, and Fidelity's
FundsNetwork. Many large brokerages have similar offerings.
Selling a fund is as easy as purchasing one. All mutual funds will redeem (buy back)
your shares on any business day. In the United States, companies must send you the
payment within seven days.
The Value of Your Fund
Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a
mutual fund. NAV per share is the value of one share in the mutual fund, and it is the
number that is quoted in newspapers. You can basically just think of NAV per share as
the price of a mutual fund. It fluctuates everyday as fund holdings and shares
outstanding change.
When you buy shares, you pay the current NAV per share plus any sales front-end
load. When you sell your shares, the fund will pay you NAV less any back-end load.
Finding Funds
The Mutual Fund Education Alliance™ is the not-for-profit trade association of the
no-load mutual fund industry. They have a tool for searching for no-load funds
CONCLUSION
A mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities.
The advantages of mutuals are professional management, diversification, economies of scale, simplicity and liquidity.
The disadvantages of mutuals are high costs, over-diversification, possible tax consequences, and the inability of management to guarantee a superior return.
There are many, many types of mutual funds. You can classify funds based on asset class, investing strategy, region, etc.
Mutual funds have lots of costs.
Costs can be broken down into ongoing fees (represented by the expense ratio) and transaction fees (loads).
The biggest problems with mutual funds are their costs and fees.
Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party.
Mutual fund ads can be very deceiving.
MUTUAL FUNDS CAN BE PURCHASED AT ALMOST EVERY BROKERAGE FIRM AND FINANCIAL INSTITUTIONS.
A mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities.
The advantages of mutuals are professional management, diversification, economies of scale, simplicity and liquidity.
The disadvantages of mutuals are high costs, over-diversification, possible tax consequences, and the inability of management to guarantee a superior return.
There are many, many types of mutual funds. You can classify funds based on asset class, investing strategy, region, etc.
Mutual funds have lots of costs.
Costs can be broken down into ongoing fees (represented by the expense ratio) and transaction fees (loads).
The biggest problems with mutual funds are their costs and fees.
Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party.
Mutual fund ads can be very deceiving.
MUTUAL FUNDS CAN BE PURCHASED AT ALMOST EVERY BROKERAGE FIRM AND FINANCIAL INSTITUTIONS.
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investment program, it is critical that you assess your current situation and form goals. Evaluating a Stock, Creating an Emergency Fund
Trust Account: Definition of a Trust; Land Trust, Living Trust, Revocable Trust. In general, a "trust" is a legal entity that is able to own property and other
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estate investing is the best wealth-builder in the world.
INVESTING / METHOD AND TECHNIQUES TO INVEST IN TODAY'S MARKET FOR A BETTER TOMORROW
STOCK MARKET: A WAY TO INVEST AND MULTIPLY YOUR MONEY. THE MARKET HAS THOUSANDS OF COMPANIES TO BUY STOCKS, Mutual Funds, Bond
Funds, Annuity. The market in which shares are issued and traded either through exchanges or over-the-counter markets.
REITs= REAL ESTATE INVESTMENT TRUST: A GREAT WAY TO INVEST IN REAL ESTATE WITHOUT TAKING A MORTGAGE LOAN
FOREX MARKET: THE LARGEST MARKET IN THE WORLD TO INVEST AND GET RICHER IF YOU USE THE RIGHT TOOLS
INSURANCE 101: THE IMPORTANCE OF INSURANCE IN SOMEONE'S LIFE. HOW TO SAVE MONEY ON YOUR INSURANCE PREMIUM? LEARN ABOUT THE
5 INSURANCE POLICIES EVERYBODY NEEDS AND THE 15 INSURANCE POLICIES YOU DON'T NEED.
REAL ESTATE INVESTMENT SECRETS REVEALED, REAL ESTATE CAN HELP YOU GET RICHER THE QUICKEST, EASIEST
WAY POSSIBLE. HOW TO GET PRE-QUALIFY FOR A HOME LOAN? HOW DOES OWNER FINANCING REALLY WORKS
SMALL BUSINESS, METHODS, TECHNIQUES, AND STRATEGIES. Business structures 101. LLP, LLC, S-corp and C-corp: It's not just alphabet soup! A
breakdown of what you need to know, in layman's terms.
Mortgage Loans Modification: SAVE YOUR HOME, SAVE YOUR CREDIT, REDUCE YOUR MONTHLY PAYMENT, AVOID FORECLOSURE
HOME REFINANCE: 10 GREAT REASONS TO REFINANCE A PROPERTY. RATES ARE STILL NEAR HISTORIC LOWS, IT MAY BE A GOOD TIME NOW TO
REFINANCE! SOUTH FLORIDA CALL: 786-709-6577 -- WE'RE LICENSED MORTGAGE BROKER
AMERICAN BANKING SYSTEM: BANKING HISTORY; GREAT THINGS TO KNOW ABOUT THE AMERICAN BANKING HISTORY
BANKING AND FINANCE, COMMERCIAL BANKING: The fundamental functions of a commercial bank during the past two centuries
SAVING: THE SECRETS OF SAVING; WAYS TO SAVE A LOT OF MONEY AND GETTING RICHER. 66 WAYS TO SAVE MONEY
MONEY MANAGEMENT: Ten Resolutions to Make Your Financial Life Easier. 10 Ways to Avoid Overdraft and Bounced Check Fees
THE 16 DAYS THAT SHOOCK THE US ECONOMY IN SEPTEMBER, 2008. A shocking series of events that forever changed the financial markets.
AMERICA’S MONEY CRISIS / Bailout 101: What new law says. Here's a rundown of key provisions of the financial rescue plan that United State Senate voted,
Wednesday October 1; and the house voted Friday October 3, 2008.
FORTUNE, CREATION AND INTRODUCTION: When you invest in stock, you buy ownership shares in a company. Before You Invest; Before undertaking any
investment program, it is critical that you assess your current situation and form goals. Evaluating a Stock, Creating an Emergency Fund
Trust Account: Definition of a Trust; Land Trust, Living Trust, Revocable Trust. In general, a "trust" is a legal entity that is able to own property and other
assets.