Your Questions About Mutual Funds
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Your Questions About Mutual Funds

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Your Questions About Mutual Funds Document Transcript

  • 1. Your Questions About Mutual FundsMandy asks…Mutual funds?I have a small amount of money I would like to invest. I have heard of mutual funds but whatare they? how do you get them? how much do they cost? how much money can you make fromthem? Is there a certain amount of time you have to wait before getting the money from them?Do they require any "upkeep"? Anything else I should know about mutual funds?Do you have suggestions for other easy investments that would be better than a mutual fund?Sorry for so many questions but i would really appreciate someone knowlegedable to help meout. Thanks!Steve Winston answers:Heres What I Know About Mutual Funds!(I’m only 16 so I hope I can be some help but here is what I know for fact.)Mutual funds are investments that pool the money of many investors and place it in stocks,bonds, and other holdings.Mutual funds are the most common investment vehicle for individuals because they don’trequire a lot of money to get started. They carry some other advantages as well.When you put your money into a mutual fund, you’re throwing your money into a pot with 1/8
  • 2. another couple hundred million dollars or so.A portfolio manager and a team of researchers are responsible for finding the best places inwhich to invest the money. While a portfolio is a group of investments assembled to meet aninvestment goal, a portfolio manager is someone who is paid to supervise the investmentdecisions of others. The managers get paid for their services from a fee within the fund, usuallya percentage of the value of the fund. Although you don’t see this fee, you should rememberthat it exists. The terms “portfolio manager” and “money manager” are used interchangeably.Both handle the management of a portfolio, be it for individuals or for a mutual fund. They arepaid a percentage of the assets under management.In addition to the portfolio manager’s fee, there are several other fees you need to be aware ofwhen deciding which mutual fund is right for you:1. No-load mutual funds let you avoid paying a sales commission on your transactions. No-loadfunds are shown by advisers who receive compensation otherwise, often by an hourly rate. Thecompanies that offer no-load funds have toll-free phone numbers that you can call forrecommendations of what funds to buy.2. Load mutual funds pay sales commissions to a broker, financial adviser, insuranceconsultant, and so on. The load, or a portion of it, is paid to the adviser who recommends themutual fund to you. If your mutual fund has a load, know how much it is and how you pay it.Fund loads/fees should be reviewed by the salesperson and stated in the prospectus(paperwork) sent from the company. Load funds have front-end loads, deferred sales charges,or back end loans:2A. Front-end loads are fees paid up front.2B. A deferred sales charge permits the load to be postponed, and it gradually declines over aperiod of years until the sales charge is 0.2C. A back-end load means you pay a set fee upon the sale of the mutual fund.Mutual funds can offer you some great advantages:1.Money can be taken directly from your bank account each month and transferred into amutual fund. This makes investing nearly painless.2.Mutual funds can offer “diversification”. (Diversification is investing your money in differentsecurities in different industries hoping to protect your investment against one or morecompanies undergoing financial disaster.) If you are “diversified”, and one or more of yourinvestments hits a slump, then you can rely on your other investments to boost your totalportfolio. You could, for instance, divide your money among three or four different types of stockfunds, ensuring that you’d always have some money invested in a profitable area of the market.Part of diversification is also investing in bonds, as well as different types of stocks. It can bedifficult for you to plan that diversification on your own, which is why people look to mutual fundsto diversify their portfolios.3.It doesn’t cost much out-of-pocket to buy mutual fund shares. If you purchase a no-load fund,you do not pay a sales charge buy the fund. “Brokerage” for the investments within the mutual.Fund, or the cost of buying or selling shares of the stocks or bonds, are generally far lower thanstandard brokerage, because the fund managers buy or sell so many shares of a security atone time and buy and sell frequently. Having this power enables them to negotiate traders for a 2/8
  • 3. lot less money than you could on your own. Many people assume that mutual funds do not payto trade securities, but that’s a false assumption. Fees occur whenever a security is traded;although the fees are usually lower inside a fund, due to the large number of shares traded.4.The Securities and Exchange Commission (SEC) oversees the records and expenses of allmutual funds.5.You can direct almost any amount of money to where you want it. If you’re into a mutual fundfor the long haul, you can direct your money to funds that invest more heavily in stocks insteadof directing your money to the more conservative bond funds.If you’re looking for mutual funds that don’t require a lot of money to open or to be contributedto each mouth, consider the following options. They all were given high ratings by “MorningstarMutual Funds”, a newsletter published twice a month by Morningstar, Inc. In Chicago:American Funds: 1-800-421-0180 www.americanfunds.comFidelity Funds: 1-800-Fidelity www.fidelity.comOakmark Funds:1-800-Oakmark www.oakmark.comT. Rowe Price: 1-800-638-5660 www.troweprice.comVanguard: 1-877-662-7447 www.vanguard.comOne final advantage of mutual funds is that they carry almost no risk of going bankrupt. Due todiversification within a fund, a mutual fund is very unlikely to lose its entire value.Take a careful look at mutual funds as you begin to think about investing your money. They’rea great place to start investing and are an excellent vehicle in which your money can grow.If you decide mutual funds are not for you, you can always invest in real estate (if you arewanting long-term investing). You can invest in stocks or bonds also.Go to your nearest book store and purchase “The Complete Idiot’s Guid To Personal Financein Your 20s and 30s Third Edition”. It has helped me understand everything about personalfinance. The book is a great guide.(Let Me Know If I Was Of Some Assistance)James asks… 3/8
  • 4. mutual funds?what is the definition of MUTUAL FUNDS?are there any additional terms of MUTUAL FUNDS?how does MTUAL FUNDS work?what are the advantages/disadvantages of MUTUAL FUNDS?Steve Winston answers:Mutual funds are a group of stocks managed together by some party. It allows the smallerinvestor to participate in the diversification of the stocks held in a mutual fund w/o actuallyhaving to purchase each and every stock for oneself.That said, mutual funds are appropriate for some and the wrong investment for a increasinglygrowing number of people.For me, I would NOT invest in mutual funds if it werent for having a 401K.Overall, Mutual funds are not good (once youre educated in investing) and many people shouldnot invest in mutual funds unless you have to (like if it were a requirement in a 401K).Heres why.First of all, mutual funds exist to take average persons money.Second, mutual funds seem to be "happy" just to do better than the S&P index, since thatsoften the gauge. A monkey, yes monkey, can usually outpick most mutual funds. Over 60% ofthe mutual funds out there cant even outperform the market (CNBC just reported the current #was 72%). Thats VERY SAD!Third, mutual funds have embedded management fees in their costs. Most of these mgmt feesare 0.5% to 2% annually. This is one of the reasons they can’t outperform the market; they takea cut out regardless of how well or poorly they do! 4/8
  • 5. Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT"losing" you lots of money. That way you stay with them and they continue to collect their fees.Did they not highlight to you that they take this fee each and every year regardless of howpoorly they do?Fifth, mutual funds are not as liquid as one might think. If youre in mutual funds and a Bushtalks in the morning and you call your broker to sell because the market is now tanking, thebroker will gladly take your order, but the order will not be executed until the day is over and thenegative impact is already priced into the fund.Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount oftime, meaning you must keep your money in the fund 90 days to 2 yrs before youre free fromthe fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so ofyour money as well.Seventh, mutual funds have to be in the market. So if the market is crashing or going down likeit has between May and now, then the funds still have to be in the market and taking thoselosses too. With some practice, you can time your monies to avoid some of those losses (itlltake practice).Convinced yet? Need more?Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, theyare probably in both the hot sectors and cold sectors. However, as an investor, you can buy intojust the sectors you want, like metals, or housing, or energy, etc. Or right now, Brokers/Dealers,Retail, and insurance!Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fundwith $10 billion in assets. 1% of that money is $100 million. How many companies are this bigwhere $100 million investment isnt the whole company? Do you want to limit yourself to justthose larger companies like Times Warner, Microsoft, home depot, Cisco, Ebay which havebeen sideways for years? I think not.A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks,so are very liquid, and do not have the high fees like the mutual funds. Further, you can buy/sellthem as you wish. They represent sectors or indexes, so buying them gives you the samediversification as the sector/industry/index, but with much less overhead!See Amex.com (american stock exchange) or ishares.com, holders.com for more info.You need to invest for yourself. If you cant, then sure, use mutual funds. But be aware of theshortcomings (and as you can see, there are many).Let me know if you have further questions.Best of luck! 5/8
  • 6. Linda asks…Mutual Funds?I need to know the Advantages and Disadvantages of mutual fundsSteve Winston answers:This has been a rather common question is this forum. I am surprised the Yahoo folks have notfeatured it.Advatages:1 diversification2. Low initial investment for participants3. Many flavors to choose from4. Well evaluated by Morningstar5. Great for people who do not wish to research individual stocksDisadvantages 6/8
  • 7. 1. Expense ratios are high2. Year end capital gains distributions are a real problem with mutual funds3. Open ended funds can only be purchased and sold after market close4. 70% of mutual funds underperform their benchmarks5. The really good funds are closed to new investorsThere is a sub class of mutual funds called index funds that have many of the advantages andfewer of the disadvantages.The disadvantages that they do not have1. Much lower expense ratios2. Most can be traded at any time the market is open. They are traded like stocks3. Virtually no year end capital gains distributions so very favorable tax treatment for most4. Do not by definition under perform their benchmarks except when subtracting the expenseratio which tends to run at less than 0.5% versus 1.5% for the average mutual fund.One of the really bid disadvantages of index funds is that some are capitalization weightedwhich means that they are not diversified investments.David asks…What mutual funds are considered a good investment?I keep hearing that one should invest in mutual funds that are a combination of around 60%stocks and 40% mutual funds. Can someone knowledgeable in mutual funds recommend acompany (like Vangard for Fidelity) that sells mutual fund that invests with this arrangement(60/40)?Thanks guys....this is great advice....all of it. I will heed your guidance. Wonder when the bottomis going to drop out of the stock market again? 7/8
  • 8. Steve Winston answers: There are many in that category. They are referred to as balanced funds. Morningstar will provide you with a 5 star rating of the best of the lot. Here is a link to all of the 5 star balanced funds. The Fidelity fund is rate as 5 stars. But check them all out. Http://screen.yahoo.com/a?cc=2%3B&nm=&proy=&mgrt=&rtmin=5&rtmax=&retrmin=&retrmax= &risrmin=&risrmax=&trytd=&troy=&trty=&trfy=&mii=&mfl=&er=&namin=&namax=&tomin=&toma x=&mmcmin=&mmcmax=&vw=1&db=funds Powered by Yahoo! Answers Read More… 8/8Powered by TCPDF (www.tcpdf.org)