Have you been considering investing money in mutual funds but you don’t know where to start? With several thousand mutual funds to choose from it can be a daunting task. Do not let this discourage you from investing in mutual funds. Over time, the stock market and mutual funds have proven to be a good long term investment. Sure they can go down, but the longer your time frame, the more likely it is you can succeed with mutual funds.
First, you should know exactly what a mutual fund is. A mutual fund is a professionally managed portfolio of investments such as stocks and bonds. When you buy a mutual fund share you own a little piece of every investment in the mutual fund’s portfolio. If the value of these investments go up, the value of your mutual fund’s share price will go up. The opposite holds true as well. If the investments go down, the mutual fund’s price per share or NAV (Net Asset Value) will go down. The type of investments each mutual fund can invest in is specifically stated in the fund’s prospectus. For example, an equity fund will usually invest in stocks while a bond fund will invest in bonds. Of course, there are mixed funds that can invest in both stocks and bonds. The type of mutual fund that is best for you depends on factors such as your age, risk tolerance, and investment goals.
Next, you should learn the main two advantages of investing in mutual funds. The first one is diversification. If you are just getting started in investing, a mutual fund allows you to spread your risk over many companies. By doing this you are effectively decreasing the likelihood of making poor investment choices. For example, if you were to only pick one or two stocks and either of them performed poorly your portfolio would almost certainly decrease. However, in a mutual fund, you own a lot of different companies so it doesn’t matter that much if a few of the companies perform poorly. The other big advantage of a mutual fund is professional management. If you are unsure of what investments to buy yourself or simply don’t have the time to do the research it is very helpful to have a professional do that for you. Of course, this professional service is not free. Each year a management fee is charged to the mutual fund. The percentage of the fee charged can vary from fund to fund so make sure the fee charged is “in line” with other mutual funds.
Now that you know what a mutual fund is and the top reasons to buy a mutual fund, you need to decide what type of mutual fund to buy. Do you want to achieve growth, income, or both? Do you want to invest in U.S. markets, foreign markets, or both? Do you want to buy a no-load fund, class A shares, or class B shares? All of these questions should be considered before making your final decision.
Dec 23 2010
What Are Bond Mutual Funds?
What’s in a name? Well, with bond mutual funds, the name clearly suggests that it invests in bonds – no question about that. Therefore, if you are thinking of investing in this type of funds, then you have to protect your principal loan while paying your income.
This means that you incur more risk whenever you generate the returns but with the bond mutual funds, you get dividends from your interest payment.
Just like with the other financial investments, it has net asset value or the NAV.
This is the dollar value of your share in the fund and the price that you pay whenever you receive an amount from the buying or selling of your shares in the fund.
Investors opt for bond mutual funds because this means more income for them and a way to diversify their portfolio. They pay higher dividends compared to savings account and money market.
They are more frequent than the individual bonds as well. When talking risks, it has lower risks and can provide the investor with the stability that he wants and needs in his portfolio.
When the investor has good bond mutual funds, this means that he is stable in the stock market.
But as an investor who is planning to go into it, you should still keep in mind that there are risks involved in this kind of investment. However, this depends on how smart your investments weigh along the stock.
The investments you get from your bond mutual funds may easily be spread out. The key is to not put all your eggs in one basket. In that case, the risk of losing it all is lowered.
Think of bond mutual funds as liquid investments and they flow faster than individual bonds. Shares are sold and bought just like that. But the advantage of this is that these are exempted from taxes – be it state or federal.
There are three kinds of bond mutual funds. These are the US government bond funds, municipal bond funds, and the corporate bond funds.
The returns of these bonds differ depending on the amount of the risks that are inherent in every fund.
If you are going to choose among the three, we suggest that you go for the US bond funds because the inflation rate depends on your debt securities and this is something that you have total control of.
Dec 17 2010
Constructing an All-Weather Mutual Fund Portfolio
Equity mutual funds perform differently in different time periods as investment styles and sectors come in and go out of favor. While screening tools readily provide performance data and make the task of identifying top mutual funds relatively easy, there is more to constructing an all-weather portfolio than screening for the top funds.
This article describes methods of constructing an all-weather portfolio. Before getting into the nitty-gritty of constructing an all-weather portfolio, it helps to know how equity mutual funds are classified and how their performance is impacted by market conditions.
Classification by Market Capitalization & Style
Equity funds are commonly classified based on market capitalization of the companies in which they invest their assets and investment style.
Market capitalization is divided into three categories: large, medium, and small. Investment style likewise is divided into three categories: value, growth, and blend.
Combining both types of classifications, equity mutual funds typically fall into one of nine boxes on a 3 x 3 matrix. This classification system works well in analyzing diversified funds.
Classification by Sector & Industry Group
Instead of dividing the equity market by market capitalization and investment characteristics such as value or growth, an alternative way is to slice it by sectors. The Global Industry Classification System jointly developed by Standard & Poor’s and Morgan Stanley Capital International, for example, classifies the equity market into ten sectors, such as financials and information technology. Each sector in turn is divided into several industry groups. This classification system is particularly useful for analyzing sector funds that invest their assets in a given sector like information technology or industry group like computer hardware.
Impact of Business Cycle
The net asset value per share of a fund changes in response to the prices of stocks held in its portfolio. Generally speaking, stock prices are impacted by business conditions. The business cycle has various phases to it: Recovery, Boom, Slowdown, and Recession. Different parts of the stock market as seen from market capitalization, style, or sector perspectives perform differently in different phases of the business cycle.
Impact on Diversified Funds
Growth style funds, in general, fare well during expansion phases such as recovery and boom, and value style funds during contraction phases such as slowdown and recession. Likewise, from a capitalization perspective, small cap funds tend to perform better during expansion and large cap funds during contraction.
Looking at the most recent boom-bust cycle, Spectra Fund, a large cap-growth fund, was among the star performers during the 1997-1999 boom. Spectra gained 141% during the three-year period ending October 31, 1999. However, Spectra fared poorly during the 2000-2002 slowdown and lost 52% during the two-year period ending October 31, 2002.
In complete contrast, Hotchkis & Wiley Small Cap Value Fund, which failed to participate in the 1997-1999 boom, was among the top funds during the 2000-2002 slowdown. Following the 30% loss for the two-year period ending June 30, 2000, Hotchkis gained 88% during the two-year period ending June 30, 2002.
Impact on Sector Funds
Like diversified funds, certain sector funds tend to perform better during some phases of the business cycle. Sector funds that invest in economically sensitive sectors such as technology typically tend to perform better during expansion phases. Sector funds that invest in economically less sensitive sectors like consumer staples typically tend to perform better during contraction phases. As a result, a sector fund that performs best in one time-period may not perform as well in another time-period.
Among the 41 Fidelity sector funds, Fidelity Select Energy Services was the top fund in 2005 with a 54% gain. However in 2003, the same fund gained just 8% to be the worst performer.
Constructing an All-Weather Portfolio
Can one select the top fund by knowing what stage the business cycle is in? Unfortunately, things do not get that easy.
Getting the turning points of the business cycle right is less than a science. Although certain styles and sectors are expected to do better during particular stages of the business cycle, there is no certainty they will do so each time. Additionally, stock prices tend to anticipate and lead the business cycle. The performance of a fund therefore usually varies from one economic cycle to another.
So, rather than chase the top funds, a prudent course is to construct a robust, all-weather portfolio.
A) Constructing with Diversified Funds
One way to construct an all-weather portfolio is to use diversified funds that emphasize different types of market capitalizations and investment styles. To simplify the task, one may construct a portfolio using a large cap-growth fund, a large cap-value fund, a small cap-growth fund, and a small cap-value fund.
In evaluating funds in each category, focus on the long-term track record and see how the funds have fared in different market environments. Complement this by evaluating each fund on non-performance-based metrics such as manager tenure, price volatility or risk, mutual fund fees, and mutual fund fiduciary grade. Choose the best available fund in each category and build your portfolio with managers of a ‘dream team’ caliber.
Alternatively, if you want to restrict yourself to only one fund to start with, you may consider a total market index fund which spans all capitalizations and styles.
B) Constructing with Sector Funds
Sector funds can also be used to construct an all-weather portfolio. This approach offers the advantage of creating customized diversified portfolios by including sectors and industry groups which are likely to outperform the market indexes and excluding those which are likely to under-perform.
The reward potential can be enhanced by concentrating in a few sectors or industry groups. Diversification across several sectors and industry groups serves to mitigate risk. By optimizing the balance between concentration and diversification, one can achieve superior nominal and risk-adjusted returns.
The AlphaProfit Core model portfolio exemplifies this approach. Over the 33 month period from September 30, 2003 to June 30, 2006, the AlphaProfit Core model portfolio gained 57% compared to 39% for Dow Jones Wilshire 5000 Total Market Index.
Key Points
1. There are no top mutual funds for all times and climes.
2. A prudent course is to build a robust, all-weather portfolio.
3. Diversified funds as well as sector funds can be used to construct an all-weather portfolio.
Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Mutual Funds included in the AlphaProfit Core and Focus model portfolios. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments or other mutual fund companies mentioned in this report. Past performance is neither an indication of nor a guarantee for future results. This document may be reproduced only in its entirety including the author’s bio and hyperlinks to AlphaProfit’s web site. Copyright
Dec 12 2010
The Best Mutual Funds For New Investors
You want to get started as a mutual fund investor. What funds should you invest in? You have thousands of different mutual funds to choose from. I suggest you first open an account with a major no-load mutual fund company like Vanguard, Fidelity or T. Rowe Price. Then pick these two funds to invest in, investing an equal amount in each.
Remember, you are just getting your feet wet and don’t want to start with a bad experience. So, here are what I suggest are your best mutual funds to get started with. Your overall risk will be low to moderate.
Your first pick is a no-brainer, a money market fund. These are the safest of all mutual funds and their value or price does not fluctuate. In this investment you simply earn interest in the form of dividends. The amount of interest you earn varies, based on interest rates in the economy.
There should be zero cost to invest in a money market fund, no commissions or sales charges called LOADS. Once you have money invested here, you can move it at will to other funds offered by the fund company (also called a fund family).
Keeping things simple, your other best “starter fund” is called a BALANCED FUND. These funds invest in both stocks and bonds, so risk is generally moderate. These days there are several variations of balanced funds, giving the investor plenty of latitude. There are traditional balanced funds, asset allocation funds, lifecycle funds and target retirement funds.
All balanced funds have a diversified portfolio of stocks and bonds, but they vary in terms of safety, dividends, and growth potential. Basically you can place them into three different risk categories: conservative, moderate, or aggressive. I suggest you go with a balanced fund labeled as moderate in the fund literature you get from the fund company.
Traditional balanced funds have been around for many years and have a moderate asset allocation of about 60% stocks and 40% bonds. This ratio of stocks to bonds remains fairly constant. These traditional funds are generally simply called “balanced funds”, and are a good solid place to invest for the new investor.
If you want to get more conservative or aggressive, I suggest lifecycle funds. For example, an aggressive-growth lifecycle fund would be the riskiest and would be heavily invested in stocks vs. bonds. Dividends would be low to insignificant. On the other hand, a conservative lifecycle fund emphasizes bonds vs. stocks, and hence is safer and pays higher dividends.
For most new investors I suggest a traditional balanced fund, or a lifecycle fund labeled as either moderate-growth or conservative-growth.
With half of your money in a money market fund and half in a balanced fund you won’t get rich quick, but you won’t lose your shirt when things get ugly in the economy either.
Once you learn how to invest and gain in confidence, you can expand your horizons. All three of the fund families mentioned offer a wide array of investment choices. Plus, all three offer funds with no commissions, no sales charges … NO-LOAD. Learn how to invest at your own pace. Until you feel up to speed, just relax and stick with your starter funds.
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