Mutual Funds

Mutual Fund Advantages Choose a mutual fund that will make you lots of money in the coming years and start investing right now. History of Mutual Funds Mutual funds are not an American invention. The first was started in the Netherlands in 1822, and the second in Scotland in the 1880's. Net Asset Value (NAV) When you invest in a mutual fund, you purchase shares in the fund at the share price (the NAV or net asset value) at the close of that day. Dollar Cost Averaging As you buy additional blocks of shares, $50 or $100 at a time, you are taking advantage of what is known as "dollar cost averaging". Advice About Choosing a Fund Even though mutual funds are professionally managed, there is still a lot of risk by choosing a fund solely on the record of its past performance, or how well it is doing this year. Mutual Fund Ratings Since 1985, a company named Morningstar has provided investors with its rating system, assigning one to five stars to funds. You will see these stars in all the mutual fund ads. Evaluating Mutual Fund Investment Risk All investments have some degree of risk. But how do you judge the risk of a mutual fund? Mutual Fund Share Classes As you become familiar with mutual funds and their prospectuses, there is constant reference to "A" shares, "B" shares etc. Mutual Fund Fees Mutual funds don’t deduct expenses directly from your account. Instead, they take a set percentage (disclosed in the prospectus) to pay for monthly expenses such as rent, salaries, etc., and profit. The Mutual Fund Prospectus Every mutual fund publishes a booklet that tells everything you need to know about it. This is called a prospectus, and is supposed to be read before your money is accepted by the fund company. How important is the manager's length of experience? From 1991 to 2000, managers with 10 or more years at the same fund averaged 14.3% per year after all expenses. Those with less than 10 years averaged 12.9%. Why is the prospectus hard to understand? When you read the prospectus, you will see lots of gibberish. Find our what to look for while researching a fund. Mutual Fund Annual Report Many mutual fund investors fail to read or understand the annual report that funds publish and mail to them each year. Here are some of the basic things to examine. Comparing Your Fund to the Competition Learn to compare your mutual fund investment to other mutual funds available in different markets. Comparing funds on an after-tax basis Why is this important? Unless your fund is held in a tax-free or tax-deferred account, the funds turnover (percent of its investment holdings that it changes during the year) can cost you a lot of money. Average Return on Investment People tend to focus on a fund's historical average and therefore believe that this is the number they can expect every year. But hey, this is an AVERAGE. How Not to Pick a Mutual Fund Avoid making the same investing mistakes many beginners tend to make. Cashing in Your Fund One of the hardest things to resist is the temptation to give up on your mutual fund because of a poor year, or even a few bad months. When to Sell Your Fund There can be good reasons to sell your fund. Find a list of reason for that could warrent selling your fund. Mutual Funds and Asset Allocation Ask any financial planner about mutual fund investing and they will give you a lesson on asset allocation. They will advise you to put part of your money in a good bond fund, part in a money market fund that invests in U.S. treasuries, and the remainder in a stock market index fund. When To Start a Mutual Fund Getting started now, not "tomorrow" is crucial. Hesitation will cost you a lot of money. Types of Mutual Funds There many kinds of stock funds, bond funds, and money market funds. Get an expert description of the different types of funds available. Value Stock Funds Most stock market experts would define a value stock as one that is priced too low when you compare its earnings and book value, per share, to other companies in the same industry. Growth Stock Funds Stocks from companies that may seem over-priced can be great "values" if the company is growing by leaps and bounds. But this kind of value is called a growth stock. Small and Micro-Cap Stocks Companies whose stock value is under $100 million are usually referred to as micro-cap, and called small-cap if the total value of their stock is between $100 million and $1 billion. Mid Cap Mid-cap companies often share the positive features of larger companies: established products and services, solid management, and long-term operating histories. Large Cap Companies These are the companies, most belonging to the S&P 500, whose market capitalization is over $10 billion. Many are old, established companies such as IBM, Ford Motor, and Proctor and Gamble. Income Stock Funds This is a category that represents companies that pay a high, regular dividend. Index Mutual Fund An index mutual fund is one whose goal is to match the target index as closely as possible, whether it is the S&P 500, Russell 2000, Barra Mid-Cap Value, etc. Enhanced Index Funds These funds juice up the S&P 500 index by weeding out laggard stocks while adding faster growing ones. Sector Mutual Funds So far we've looked at broad categories. Stocks can also be divided into the industry type “sector funds”. Stock Market Sectors Discover a comprehensive list of major stock market sections or industries. Defensive Stocks Another group of stocks are called Defensive and are mostly part of the consumer non-cyclical group. These are companies that make things that are immune to the ups and downs of the economy, such as tobacco, soap, drugs, diapers, food and beverages. International Funds These are mutual funds that invest in companies from around the world. Technically, if the fund is a "global" or "world" fund, then it invests in a combination of foreign and U.S. companies. Real Estate Mutual Funds These funds invest in real estate investment trusts (reits) that trade on the NYSE. A reit invests in real estate, mortgages, or both. Socially Responsible Funds Invest only in companies who are good for the environment. They also avoid tobacco, alcohol, and weapons manufactures. Balanced Funds Balanced funds invest part of their money in stocks and part in bonds and U.S. treasuries. Tax-Efficient Funds If your investments are in a tax-advantaged account such as an IRA or 401k, you want maximum return without any consideration for tax-impact. Bond Convertible Funds Invest in bonds and preferred stocks that are convertible into common shares at a set conversion ratio within a given amount of time. Junk Bond Funds You can look all you want for a mutual fund with “junk bond” in the fund’s name, but you won’t find it. That term is a nickname for bonds issued by companies with poor credit ratings. Mixtures of Stock Types Besides the types of funds discussed so far, there are many other combinations of stocks. Truly something for every kind of investor. Closed End Funds Closed-end funds have an initially set number of shares, which are then traded like stocks on the NYSE. Exchange Traded Funds (ETF’s) Traded on the American Stock Exchange, ETF’s are “baskets” of stocks representing a stock market index. They trade exactly like a regular stock. Stock Picking Strategy There are services such as Sharebuilder that let you create your own mutual fund, picking your own basket of stocks, for what appears to be only a small fee. But can you choose what will be the long term winners better than a seasoned mutual fund manager? Fund names - What They Really Invest In This is probably a good time to alert you to the vast leeway that fund management is allowed, in choosing how your money is invested. How to Get Started Learn what you can start doing today with mutual fund investing. Where Can I Start Investing with No Money? This sounds a little hard to believe, but yes, there are two mutual fund companies that will let you sign up with no money to start, $0.00!