Mutual Funds

508 views

Published on

Learn All you need about mutual funds. Stock or mutual funds? ... you decide.

Published in: Economy & Finance, Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
508
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Mutual Funds

  1. 1. Mutual FundsStock or Mutual Funds... You DecideMutual Fundsby Hector JayatBrought to you by Finance Tipspage 1 / 19
  2. 2. Mutual FundsStock or Mutual Funds... You DecideGoing global through mutual fundsThere are more than 13500 different publicly traded companies in the worldtoday, and there are over 700 more companies expected to go public within ayear. In addition, every major developed country offers investors various bondsto invest in. All of this makes for a lot of different investments and plenty ofchoice. Investors can take advantage of this choice through a good globalbalanced fund that invests in bonds and stocks or a global equity fund thatinvests in stocks all around the world.A global equity fund invests in stock markets around the world. These fundswill have a portion of their investments invested in North America. Europe,and Asia. Some of these funds will own hundreds of securities in order toparticipate in the growth prospects of many firms while diversifying the riskassociated with investing in different companies. A good global equity fundwill be a foundation for a well-diversified mutual fund portfolio for almost anyinvestor. Investors could consider including the AGF International Value Fund,the BPI Global Equity Fund, or the Fidelity International Portfolio Fund intheir portfolios.A global balanced fund is a fund that invests in both stock and bond marketsaround the world. These funds will also always have a portion of theirinvestments invested in stock and bond markets located in North America,Europe, and Asia. They are more conservative than global equity fundsbecause they invest in a combination of stocks and bonds, which affect thefunds performance. Over the long term these funds will provide a lower rate ofreturn for investors but they will also exhibit a lot less risk than a global equityfund. They exhibit less risk because bonds are less volatile than stocks; they donot decline in value to the same magnitude or at the same time as global equityfunds. A conservative investor should find a good global balanced fund thatwill serve as a good foundation for a diversified portfolio.page 2 / 19
  3. 3. Mutual FundsStock or Mutual Funds... You DecideMutual Fund ExpensesAn informed investor knows where his money is going. For an investor inmutual funds, it is essential to understand the expenses of mutual funds. Theseexpenses directly influence the returns and cannot be neglected.The expenses of mutual funds are met from the capital invested in them. Theratio of the expenses associated with the operation of the mutual fund to thetotal assets of the fund is known as the “expense ratio.” It can vary from as lowas 0.25% to 1.5%. In some actively managed funds it may be even 2%. Theexpense ratio is dependant on one more ratio – “the turnover ratio”.“The turnover rate” or the turnover ratio of a fund is the percentage of thefund’s portfolio that changes annually. A fund that buys and sells stocks morefrequently obviously has higher expenses and thus a higher expense ratio.The mutual fund expenses have three components:The Investment Advisory Fee or The Management Fee: This is the moneythat goes to pay the salaries of the fund managers and other employees of themutual funds.Administrative Costs: Administrative costs are the costs associated with thedaily activities of the fund. These include stationery costs, costs of maintainingcustomer help lines and so on.12b-1 Distribution Fee: The 12b-1 fee is the cost associated with theadvertising, marketing and distribution of the mutual fund. This fee is just anadditional cost which brings no actual benefit to the investor. It is advisablethat an investor avoids funds with high 12b-1 fees.The law in US puts a limit of 1% of assets as the limit for 12b-1 fees. Also notmore than 0.25% of the assets can be paid to brokers as 12b-1 fees.page 3 / 19
  4. 4. Mutual FundsStock or Mutual Funds... You DecideIt is important for the investor to watch the expense ratio of the funds that hehas invested in. The expense ratio indicates the amount of money that the fundwithdraws from the funds assets every year to meet its expenses. More theexpenses of the fund, lower will be the returns to the investor.However it is also essential to keep the performance of the funds in mind too.A fund may have higher expense ratio, but a better performance can more thancompensate higher expenses. For example, a fund having expense ratio 2% andgiving 15% returns is better than a fund having 0.5% expense ratio and giving5% return.Investors should note: It is not sensible to compare returns of funds in differentrisk classes. Returns of different classes of funds are dependant on the risksthat the fund takes to achieve those returns. An equity fund always carries agreater risk than a debt fund. Similarly an index fund that invests only inrelatively stable and thus less risky index stocks, cannot be compared with afund that invests in small companies whose stocks are volatile and carry greaterrisk.Avoiding funds with high expense ratio is a good idea for the new investor.The past performance of a fund may or may not be repeated, but expensesusually do not vary much and will certainly reduce returns in future too.page 4 / 19
  5. 5. Mutual FundsStock or Mutual Funds... You DecideStocks Or Mutual Funds?If you happen to have some money left over at the end of all the bill paymentsand you have no need for anymore toys, or even if you are beginning a prudentand fiscally responsible gamble on some wealth that incorporates investmentopportunities, you may find yourself wondering whether investing in stocks orpurchasing mutual funds will offer the best returns. You might also considerthis question when considering how to set up a retirement fund.In order to help make the decision, it is important to understand what stocksand mutual funds are.Stocks: Most people believe they have a basic understanding of what stocksare, simply because of their exposure to the term in every day usages. Stocksare individual bits of companies that are available to be purchased by thepublic in open trading on the stock exchange. Stocks are often sold in bundles,and thus to purchase a stock in a specific company often entails some kind ofminimum purchase. Stockholders have a vested interest in the company’swell-being, as the price of their stocks are directly related to a company’sperformance. Stocks are divided according to the kind of business theyrepresent, which is known as a sector.Mutual Funds: Mutual funds are collective investments that pools the moneyfrom a lot of investors and puts the money in stocks, bonds, and otherinvestments. Mutual funds are usually managed by a certified professional, asopposed to the individual management of stocks. In essence, mutual fundsincorporate many different types of stocks.The question of whether or not to invest in stocks or mutual funds willprimarily come down to the personal expertise and wealth of the individual.Many people will be tempted by the “game” aspect of buying stock, as well asthe chance to invest singularly in a company that is well-known or can beeasily researched. The fact is, however, that by the time stocks becomeavailable on the market they are generally already highly priced, and investingpage 5 / 19
  6. 6. Mutual FundsStock or Mutual Funds... You Decidein individual stocks is a highly risky maneuver as your entire process hangs onthe well-being of just one company. Even wealthy investors diversify theirportfolios by investing in several different types of stock, and this can simplybe unaffordable for the average person.The better bet for the beginning investor is to purchase mutual funds. Mutualfunds will pool the costs of many different stocks, lessening the risk of losingyour money and raising the chances of gain. Mutual funds may not providequite the excitement of investing in a lucky stock, but they are goodinvestments for a long-term financial opportunity. In addition, mutual funds aremanaged by professionals that are well acquainted with the pitfalls andopportunities of the investment sector, which will cut down on both risk andthe time it would take to pick individual stocks through research andappointments. Mutual funds will also distribute the risks among severalinvestors, and it is all managed by someone who likely has contacts within thefinancial world.For the individual with some extra money, who does not have the time or theexpertise to properly “play” the stock market, mutual funds will prove thebetter option.page 6 / 19
  7. 7. Mutual FundsStock or Mutual Funds... You DecideMutual Fund As Your Alternative Investment PortfolioPeople always say that investment is a money game with the playing rule of"high risk with high return and low risk with low risk". You may want to investin an investment portfolio that is able to give a good return and stock market isalways the best choice in term of high return. But you aware that investment inthe stock market will cause you to lose all your money as well, because thegame rule said "high risk is high return and low risk comes with low return".Hence, stock game might not suit your risk profile; you may want to look foran alternative that can give comparatively good reward but with much lowerrisk than stock. If you are categorized in this group, then mutual fund can beyour game.Mutual Fund Is A Risk Sharing GameA mutual fund is simply a financial medium that allow a group of investors topool their money together with a predetermined investment objective. Thepooled money will manage by a fund manager. The fund manager is a personwho is widely expert in stock and bond markets. He/she is responsible to investthe pooled money into specific securities, usually stocks and bonds. When youare buying shares of mutual fund, you will become one of the fundsshareholders. All the gains and losses will be shared among the fundsshareholders. Hence, mutual fund is a risk sharing game.Compare to stocks and bonds, mutual funds are one of the cost effective and aneasy playing game. You do not need to really expert in stock and bond marketbecause the fund manager will take care of it; and you do not need to crackyour head to figure out which stocks or bonds to buy, because you have theexpert, the fund manager to make the decision for you.You do not need a lot of money to get your start the game; you decide theamount of money you plan to invest into the mutual fund. Some mutual fundsmay even let you start with just $100. The best part is the cost effectiveness.By pooling money together in a mutual fund, investors can purchase stocks orpage 7 / 19
  8. 8. Mutual FundsStock or Mutual Funds... You Decidebonds with much lower trading cost. The biggest advantage of mutual funds ascompare to stocks or bonds is "diversification".Diversification Will Lower The RiskInvestment experts always advise that if you want to invest you money, "Dontput all your eggs into the same basket; else if the basket fall, all you eggs willbreak", some will happen on your money, if you invest in one stock, if thestock perform negative, you loss all you money. Diversify your investment tospread out your money into many different types of investments. When oneinvestment is down, another might perform in up trend.Hence, with the diversification of your investment, you will reduce your risktremendously.You can diversify your investment by purchasing different kinds of stocks andbonds instead of one. But it may take weeks to buy all these investments. Incontrary, you can get these done by purchasing a few mutual funds and mutualfunds automatically diversify your investment across many stocks and bonds.In SummaryMutual fund is a risk sharing investment portfolio, its provides you a mediumof investing your money into a high earning stock & bond market whileautomatically diversify your investment to reduce your risk. Hence mutualfund can be your alternative of investment portfolio that will give you higherreward and lower risk.page 8 / 19
  9. 9. Mutual FundsStock or Mutual Funds... You DecideMarket timing with your mutual fundsWhen investing in bonds, stocks, or mutual funds, investors have theopportunity to increase their rate of return by timing the market - investingwhen stock markets go up and selling before they decline. A good investor caneither time the market prudently, select a good investment, or employ acombination of both to increase his or her rate of return. However, any attemptto increase your rate of return by timing the market entails higher risk.Investors who actively try to time the market should realize that sometimes theunexpected does happen and they could lose money or forgo an excellentreturn.Timing the market is difficult. To be successful, you have to make twoinvestment decisions correctly: one to sell and one to buy. If you get eitherwrong in the short term you are out of luck. In addition, investors shouldrealize that:1. Stock markets go up more often than they go down.2. When stock markets decline they tend to decline very quickly. That is,short-term losses are more severe than short-term gains.3. The bulk of the gains posted by the stock market are posted in a very shorttime. In short, if you miss one or two good days in the stock market you willforgo the bulk of the gains.Not many investors are good timers. "The Portable Pension Fiduciary," byJohn H. Ilkiw, noted the results of a comprehensive study of institutionalinvestors, such as mutual fund and pension fund managers. The studyconcluded that the median money manager added some value by selectinginvestments that outperform the market. The best money managers added morethan 2 percent per year due to stock selection. However the median moneymanager lost value by timing the market. Thus, investors should realize thatmarketing timing can add value but that there are better strategies that increasepage 9 / 19
  10. 10. Mutual FundsStock or Mutual Funds... You Decidereturns over the long term, incur less risk, and have a higher probability ofsuccess.One of the reasons why it is so difficult to time correctly is due to the difficultyof removing emotion from your investment decision. Investors who invest onemotion tend to overreact: they invest when prices are high and sell whenprices are low. Professional money managers, who can remove emotion fromtheir investment decisions, can add value by timing their investments correctly,but the bulk of their excess rates of return are still generated through securityselection and other investment strategies. Investors who want to increase theirrate of return through market timing should consider a good Tactical AssetAllocation fund. These funds aim to add value by changing the investment mixbetween cash, bonds, and stocks following strict protocols and models, ratherthan emotion-based market timing.page 10 / 19
  11. 11. Mutual FundsStock or Mutual Funds... You DecideWhy You Should Buy No-Load Funds!Load is defined as the fee or the commission that an investor pays to a mutualfund at the time of purchasing or redeeming the shares of the mutual fund.If the commission is charged when the investor buys the shares, it is known asa front-end load. On the other hand if the commission is charged when theinvestors redeems his shares, it is known as a back-end load.Certain funds apply back-end loads only if the shares are redeemed within aspecific time period after being bought.The argument for applying loads on mutual fund transactions is that these loadswill discourage investors from trading frequently in mutual funds. If theinvestors quickly move in and out of mutual funds, the funds have to maintaina high cash position to meet these redemptions, which in turn decreases thereturns of the funds.Also frequent trading means the expenses of the mutual funds go up.There are various arguments against load funds:-The fees that the mutual funds collect as loads are passed on to the fundbrokers. The loads do not provide any incentive for the fund manager for betterperformance of the funds. In other words, a load fund has no reason why itsmanagers should perform better than those of no-load funds.-In the last few decades, no difference has been seen in the returns of load andno-load funds (if the loads are not considered.) When the loads are considered,the investors of load funds have actually gained less than the investors ofno-load funds.-When a sales person knows that he is going to get a commission from a loadfund, he tends to push the load fund more - even when the load funds areperforming poorly as compared to no-load funds.page 11 / 19
  12. 12. Mutual FundsStock or Mutual Funds... You Decide-Loads are understated by mutual funds. If an investor invests $1000 in a fundwith 5% front-end load, the actual investment is only $950. Thus his actualload is $50 in $950 investment - a 5.26% load.If an investor is already invested in a load fund, it doesn’t make sense to exitnow. The load has already been paid for. The hold or sell decision should nowonly be based on what the investor thinks about the future performance of thefund. In a few funds, the exit load depends on the period for which the fundwas held. Check the details of the fund prospectus for more information.In most cases it is better to avoid load funds; however, investors should keepone thing in mind. Sometimes load funds can be a better choice than no-loadfunds. For example, an investor has a choice of two classes in a fund - class Aand class B. Class A has 3% front-end load and Class B has no load. Theinvestor however misses the fine print, which states that Class B has 1% 12b-1annual fees.If the fund will make 10% gains each year, its return in Class A (starting withactual amount invested $970) will be($970) X (1.10) X (1.10) X (1.10) X (1.10) X (1.10) = $1562For Class B, the returns will be($1000) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X(0.99) X (1.10) X (0.99) = $1532.Thus the above example is an exception, where in the long run, the load fundwill perform better than the no-load fund (with 12b-1 fees).The fact is that a no-load fund cannot be considered a true no-load fund, if itcharges fees from its investors in the form of 12b-1 and other fees.page 12 / 19
  13. 13. Mutual FundsStock or Mutual Funds... You DecideHow to select a mutual fundOne of the most common ways of selecting a mutual fund is to invest with thecrowd in todays hot funds. Unfortunately, jumping from one winning fund toanother is a recipe for disaster. The mutual funds that the crowd followstypically have had a hot recent performance and tend to gather all the newmutual fund sales.Investors as a whole are primarily allocating their new investments to a smallnumber of mutual funds and to a smaller number of mutual fund companies.Investors have invested over $400 billion in the 2843 different mutual funds,but one-third of those assets are invested in only 50 of those funds and one-halfof those assets are invested in the largest 100 funds.There are benefits to following the market leaders. Larger mutual fundcompanies and larger funds have the ability to reduce costs and attract the bestprofessional money managers. However, the biggest limitation is that todaysbetter-selling mutual fund may not be tomorrows winner. This is true for anymutual fund but it seems to plague the best seller, and the one that garners themost attention, the most often.So buying the equity fund that was yesterdays best-seller isnt a strategy thatproduces excellent returns. You do not have to go fully in the oppositedirection and ignore these hot funds, but you should understand theirlimitations and strengths. They became best-selling funds because they havemerit, but you have to access that merit within your own well-diversifiedportfolio, and not the crowds current investment trend.page 13 / 19
  14. 14. Mutual FundsStock or Mutual Funds... You DecideHow To Pick A Profitable Mutual FundWe have all heard the advantages of investing in a mutual fund over trying topick individual stocks. First of all mutual funds hire professional analysts thatare market experts and devout many hours of study to the various stocks.Unless you want to devout a large portion of your free time to the study of thefinancial reports, you probably won’t have as much information to make adecision as a mutual fund manager.Then there is the well documented advantage of diversification. Risk is reducedby holding several non correlated investments. Put simply, some go up, somego down and combined, the return levels off the fluctuations, or risk.Finally, a mutual fund offers smaller investors a chance to invest in smallincrements rather than having to save a large chunk of cash to purchase 100shares of stock.Given the above advantages, it’s no wonder that mutual funds have become avery popular form of investing. Now there are thousands of mutual funds tochoose from, so how does one make a selection? Here are a few tips:1. Do not be seduced to jump on the recently performing best fund. It mayseem like the safe and rational thing to do, but like individual stocks, you wantto buy low and sell high, not buy high and pray for more growth.2. Even good funds may not be able to overcome the force of the overallmarket. You should be looking for funds that can exceed the broad marketwithout increasing risk. Each fund has certain risk parameters that it is requiredto follow. Read the prospectus closely to understand what these are.3. Limit the number of funds that you own. Unless you are trying to simplyachieve the same returns as the broad market, diversifying into many mutualfunds will not reduce your risk or increase your return by much.page 14 / 19
  15. 15. Mutual FundsStock or Mutual Funds... You Decide4. Funds that become too popular and too big tend to slip in performance.There are several reasons for this.Find more valuable mutual fund resources at www.best-mutual-fund.infoOne final point to keep in mind is that the type of fund will totally depend onyour investment objectives. There are certain funds that are designed for yourobjectives be they retirement, income, growth, funding the kids college, etc.page 15 / 19
  16. 16. Mutual FundsStock or Mutual Funds... You DecideHow to Avoid a bad Mutual FundWe have all heard the advantages of investing in a mutual fund over trying topick individual stocks. First of all mutual funds hire professional analysts thatare market experts and devout many hours of study to the various stocks.Unless you want to devout a large portion of your free time to the study of thefinancial reports, you probably wont have as much information to make adecision as a mutual fund manager.Then there is the well documented advantage of diversification. Risk is reducedby holding several non correlated investments. Put simply, some go up, somego down and combined, the return levels off the fluctuations, or risk.Finally, a mutual fund offers smaller investors a chance to invest in smallincrements rather than having to save a large chunk of cash to purchase 100shares of stock.Given the above advantages, its no wonder that mutual funds have become avery popular form of investing. Now there are thousands of mutual funds tochoose from, so how does one make a selection? Here are a few tips:1. Do not be seduced to jump on the recently performing best fund. It mayseem like the safe and rational thing to do, but like individual stocks, you wantto buy low and sell high, not buy high and pray for more growth.2. Even good funds may not be able to overcome the force of the overallmarket. You should be looking for funds that can exceed the broad marketwithout increasing risk. Each fund has certain risk parameters that it is requiredto follow. Read the prospectus closely to understand what these are.3. Limit the number of funds that you own. Unless you are trying to simplyachieve the same returns as the broad market, diversifying into many mutualfunds will not reduce your risk or increase your return by much.4. Funds that become too popular and too big tend to slip in performance.There are several reasons for this.page 16 / 19
  17. 17. Mutual FundsStock or Mutual Funds... You DecideFind more valuable mutual fund resources at www.best-mutual-fund.infoOne final point to keep in mind is that the type of fund will totally depend onyour investment objectives. There are certain funds that are designed for yourobjectives be they retirement, income, growth, funding the kids college, etc.page 17 / 19
  18. 18. Mutual FundsStock or Mutual Funds... You DecideNeed Some Mutual Fund Info?Mutual fund info is one of the most sought after things on the market when itcomes to investing. People are considering this fun option for many reasons.First, what is a mutual fund? It is a way of allowing many investors to pooltheir money together and to allow a professional investment manager tomanage the money in the larger sum. Because more is invested as the group,more money can be made in this situation. But, who, what, where and when areall questions that many people are asking as well. Mutual fund info is rightaround the corner though.To have the right mutual fund info, you need to do several things. First, youneed a personal knowledge, at least somewhat so that you know what ishappening and what could happen with your investment. Knowing what ishappening will give you an edge, so to speak. Secondly, you need to find atrustworthy investment manager to use for your mutual fund needs. Many ofthese funds can be found through your financial advisor. To find a manager ofyour money, it is wise to compare several companies including their history ofmanagement, their fees, and the means in which they will communicate withyou.That said, it is still wise to keep an eye on your personal investment at alltimes. Nevertheless, there are excellent companies out there that willsuccessfully manage your investments, no matter how large or small to yourspecific needs. It is wise to take the time to find just the right company. Mutualfund info can be found updated continuously right here on the web.There are also many information portals now devoted to the subject and werecommend reading about it at one of these. Try googling for “mutual fund”and you will be surprised by the abundance of information on the subject.Alternatively you may try looking on Yahoo, MSN or even a decent directorysite, all are good sources of this information.page 18 / 19
  19. 19. Mutual FundsStock or Mutual Funds... You DecideThanks for reading this book. Find more articles at Finance TipsPowered by TCPDF (www.tcpdf.org)page 19 / 19

×