Metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used proxy for the U.S. stock market, are hardly at bargain levels. This has lead several market pundits to predict single digit annual returns for domestic mutual funds over the next decade. While pursuing the search for the best mutual fund, some mutual fund investors tend to focus exclusively on fees and expense ratios. The rationale is that by choosing mutual funds with low fees, investors will have more of their capital invested. Also, no load mutual funds with low expense ratios will pass on more of the returns they earn to their shareholders. Is shopping for the lowest fees and expense ratios a smart way to select mutual funds? Not always. The answer depends on the type of mutual fund you are evaluating, the time you can devote to evaluating and managing your mutual funds investments, and the type of cost incurred.
What exactly is a mutual funds? Mutual funds are sold in shares to the public, allowing them to own different percentages of the fund depending on the amount they invest. Pay more = own more. Own more = get more $$ back again (theoretically) Simple. Stocks, bonds, money market securities and the like are purchased through the assets of these mutual funds in the financial markets. Shareholders indirectly own the assets held in the mutual fund, but the fund is guided by the investment company that finds the best way to earn the biggest return. (Indirectly owning the assets through these funds allows them to avoid the big tax hit.)
How does a Mutual Fund work? Usually, mutual funds are also known as open-ended investment companies. This means that they constantly issue new shares and redeem existing shares, but not all mutual funds are open however. Some mutual funds are 'locked' where they no longer will take on new investors. The fund's Net Asset Value is the key concept to understanding how a mutual fund operates. By this value you can determine the value of a share of the fund at any time. The market value of the fund's assets less any liabilities, divided by the number of shares outstanding is the formula to understand Net Asset Value. If you work through that it will show you exactly how much each share in the fund is worth when you are looking to invest in them. By comparing this number over time you can see the returns earned in a percentage. This is generally all done for you on a funds website or on any of the mutual fund sites that feature stats.
Who does what? Mutual funds basically take your money, combine it with the money of other investors like you and then invest the total pool of money in investments with the best possible return. The returns from the fund are then split to the accounts that bought in by the amount of shares that each person owns. The fund managers then take their cut based on the fees that they charge you and you get your return. These guys are worth it for the money they make you, so why not let them drive the car for a while and let you get the glory? Different investment plans are a staple of the field, allowing investors to do so on a regular amount weekly, monthly, or however else you want to set it up. Continuously invested accounts tend to get a higher yield on average, but if you don't have the ability to do that, you can still make money. Dollar cost averaging should be your goal; it is the strategy of the top investment experts in the country.
How much do they cost? Different mutual funds have different types of fees involved with them as well. Some will charge you an up front percentage of your investment (front load). Some will charge you a percentage of the investment when sold, this is a back end load. Then there are no-load funds which charge you nothing more than the annual operating fees. An individual should seek to only use the no load funds since it saves a lot of your money. There are really no advantages to using a loaded fund unless it offers some incredibly returns. But normally you can find the same returns by several different fund companies.
You must not be lured into investing in the currently best performing fund. But you must go for mutual funds that have low purchase rate and are high on selling. However, even the good funds cannot overwhelm the trend of market. So be careful in choosing funds that can be strong in a low market trend. Moreover, you must go through the prospectus to read the risk tolerance. Moreover, diversifying into many mutual funds does not diminish your risk or increment your return. So before moving on to mutual funds in 2007, one final point is that the type of fund wholly relies on your investment goals. Different funds prevail in market and you can choose depending on your aims whether they are retirement, income, expansion, educational needs etc.
What exactly is a mutual funds? Mutual funds are sold in shares to the public, allowing them to own different percentages of the fund depending on the amount they invest. Pay more = own more. Own more = get more $$ back again (theoretically) Simple. Stocks, bonds, money market securities and the like are purchased through the assets of these mutual funds in the financial markets. Shareholders indirectly own the assets held in the mutual fund, but the fund is guided by the investment company that finds the best way to earn the biggest return. (Indirectly owning the assets through these funds allows them to avoid the big tax hit.)
How does a Mutual Fund work? Usually, mutual funds are also known as open-ended investment companies. This means that they constantly issue new shares and redeem existing shares, but not all mutual funds are open however. Some mutual funds are 'locked' where they no longer will take on new investors. The fund's Net Asset Value is the key concept to understanding how a mutual fund operates. By this value you can determine the value of a share of the fund at any time. The market value of the fund's assets less any liabilities, divided by the number of shares outstanding is the formula to understand Net Asset Value. If you work through that it will show you exactly how much each share in the fund is worth when you are looking to invest in them. By comparing this number over time you can see the returns earned in a percentage. This is generally all done for you on a funds website or on any of the mutual fund sites that feature stats.
Who does what? Mutual funds basically take your money, combine it with the money of other investors like you and then invest the total pool of money in investments with the best possible return. The returns from the fund are then split to the accounts that bought in by the amount of shares that each person owns. The fund managers then take their cut based on the fees that they charge you and you get your return. These guys are worth it for the money they make you, so why not let them drive the car for a while and let you get the glory? Different investment plans are a staple of the field, allowing investors to do so on a regular amount weekly, monthly, or however else you want to set it up. Continuously invested accounts tend to get a higher yield on average, but if you don't have the ability to do that, you can still make money. Dollar cost averaging should be your goal; it is the strategy of the top investment experts in the country.
How much do they cost? Different mutual funds have different types of fees involved with them as well. Some will charge you an up front percentage of your investment (front load). Some will charge you a percentage of the investment when sold, this is a back end load. Then there are no-load funds which charge you nothing more than the annual operating fees. An individual should seek to only use the no load funds since it saves a lot of your money. There are really no advantages to using a loaded fund unless it offers some incredibly returns. But normally you can find the same returns by several different fund companies.
You must not be lured into investing in the currently best performing fund. But you must go for mutual funds that have low purchase rate and are high on selling. However, even the good funds cannot overwhelm the trend of market. So be careful in choosing funds that can be strong in a low market trend. Moreover, you must go through the prospectus to read the risk tolerance. Moreover, diversifying into many mutual funds does not diminish your risk or increment your return. So before moving on to mutual funds in 2007, one final point is that the type of fund wholly relies on your investment goals. Different funds prevail in market and you can choose depending on your aims whether they are retirement, income, expansion, educational needs etc.
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