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    Free Essay
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    Exchange traded funds why you should never buy a mutual fund again

     

    Copyright 2006 Equitrend, Inc. Many investors still don't know about Exchange Traded Funds (or ETFs) and their advantages over traditional mutual funds. In this article, we'll examine Exchange Traded Funds, their history, performance and advantages and why you should never buy a mutual fund again. ETF 101 Exchange Traded Funds can most accurately be described as the happy marriage of a stock with a mutual fund. Like mutual funds, when an investor buys an ETF, he is buying a pool of securities at one time. For instance, an ETF known as DIA, or "Diamonds." allows the investor to take a position in the Dow Jones Industrial Average. Like a stock, an ETF can be purchased through a brokerage account, can be traded throughout the day, can be bought on margin and offers stock-like trading features such as limit orders, stop orders and short selling ETFs come in many different flavors. They track all the major indexes like the Dow, S&P 500, NASDAQ 100, Russell 2000 and others. They're also available for investors who want to trade sectors like energy, technology, precious metals, financial, health care, emerging markets, interest rates and many more. Introduced over 12 years ago, ETFs were initially mostly used by professional traders, but in recent years, have experienced rapid growth as a popular investment vehicle with public investors. ETFs have gained such widespread acceptance and popularity because they provide significant advantages over mutual funds. The advantages of ETFs include: --Continuous pricing throughout the day compared to end-of-day pricing for mutual funds --Can be sold short like a stock which isnЎ¦t possible with mutual funds --Can be bought on margin --Can use limit and stop orders so you can exit or enter during the trading day --Have lower expenses than mutual funds and no management fees Adding it all up, it's easy to see why Exchange Traded Funds have been growing at a rate of nearly 50% per year since 1993. Conclusion: It's easy to see why Exchange Traded Funds have steadily grown in popularity over the last twelve years. By combining the benefits of a mutual fund with the benefits of a stock, they really do offer investors an optimum combination of flexibility and potential profit. Of course, the large mutual fund companies don't like ETFs but have had to adjust to their new popularity and so many fund families have introduced ETFs of their own in recent years. For investors, ETFs offer considerable advantages of flexibility, cost and diversity, and therefore, you should never buy a mutual fund again.

         
    Get the mortgage quote your bank doesn t want you tosee

     

    Deciding to consider refinancing of mortgage for home loan is a major determination. Next key issue involved is to find ways to get profitable quotes for mortgage from banks. A thorough research of prevailing market rates is essential to obtain competitive quote from mortgage firms. Being familiar with current trends enables one stand a better chance of bargaining for lower interest charges. Mortgage rates usually increase or decrease in accordance with securities in Wall Street. A careful overview of market trends helps one save considerably on interests. Comparing different loan schemes from a particular mortgage vendor and also form different vendors would facilitate one to choose the most profitable scheme. Among major tools available in market for evaluating dissimilar loans programs is the Annual Percentage Rate (APR). Laws of the state make it mandatory to expressively disclose APR while marketing their mortgage rates. This is for the benefit of borrower and to prevent them from falling prey to lower advertised rates, and find out if there are any hidden fees and upfront costs involved later. Personal meeting with lenders, bank officials’ and mortgage professionals’ help in getting a competitive interest quote for your loan. Being well prepared with entire documentary evidence in support of your financial situation before meeting the people at bank enhances chances of receiving lower interests. Presenting documents to support your favorable credit history would tempt bank managers to provide you with lucrative mortgage quotes. Papers essential to obtain fast and lucrative loans rates include: • Verification of employment status and proof of income sources. • Previous paid credit card bills and other similar statements to show history of genuine payments in past. • Purchase contract of the house if it is available. • Bank details such as address of bank and your account numbers are important. Also previous 2-3 months statement of current and savings account are required. • Tax returns of last two years provide excellent proof of your financial position and hence should always be carried along while visiting the mortgage professional. • Entire information about other existing debt like car loans, student loans, retail credit cards or furniture loans, if any are required to acquire mortgage deal. • Presenting any gift vouchers received from relatives and friends would encourage bank managers to have increased faith in your paying capabilities. Such gift letters ensure that money acquired through gifts belongs to the recipient and the recipient does not have any liability on such financial assets. • Self-employed individuals may present their previous year’s balance sheets and other tax statements. Another good deal is about initially locking the specific rate of interest at time of proposal that would be charged. The process of loan approval might take some time and during such a time interval there might be fluctuation in rates of interest. Getting mortgage quote fixed at time of application relieves one from falling prey to chances of higher charges being imposed at time of loan approval. Interest rates charged by bank also depend upon factors as amount of loan required, time period of loan, down payment, discount points, adjustable rates, closing stocks and so on.

         
    Going global through mutual funds

     

    There are more than 13500 different publicly traded companies in the world today, and there are over 700 more companies expected to go public within a year. In addition, every major developed country offers investors various bonds to invest in. All of this makes for a lot of different investments and plenty of choice. Investors can take advantage of this choice through a good global balanced fund that invests in bonds and stocks or a global equity fund that invests in stocks all around the world. A global equity fund invests in stock markets around the world. These funds will have a portion of their investments invested in North America. Europe, and Asia. Some of these funds will own hundreds of securities in order to participate in the growth prospects of many firms while diversifying the risk associated with investing in different companies. A good global equity fund will be a foundation for a well-diversified mutual fund portfolio for almost any investor. Investors could consider including the AGF International Value Fund, the BPI Global Equity Fund, or the Fidelity International Portfolio Fund in their portfolios. A global balanced fund is a fund that invests in both stock and bond markets around the world. These funds will also always have a portion of their investments invested in stock and bond markets located in North America, Europe, and Asia. They are more conservative than global equity funds because they invest in a combination of stocks and bonds, which affect the fund's performance. Over the long term these funds will provide a lower rate of return for investors but they will also exhibit a lot less risk than a global equity fund. They exhibit less risk because bonds are less volatile than stocks; they do not decline in value to the same magnitude or at the same time as global equity funds. A conservative investor should find a good global balanced fund that will serve as a good foundation for a diversified portfolio.

         
    Hedge funds establishing a new frontier

     

    It is difficult to provide a general definition of a hedge fund. Initially, hedge funds would sell short the stock market, thus providing a "hedge" against any stock market declines. Today the term is applied more broadly to any type of private investment partnership. There are thousands of different hedge funds globally. Their primary objective is to make lots of money, and to make money by investing in all sorts of different investments and investments strategies. Most of these strategies are more aggressive than than the investments made by mutual funds. A hedge fund is thus a private investment fund, which invests in a variety of different investments. The general partner chooses the different investments and also handles all of the trading activity and day-to-day operations of the fund. The investor or the limited partners invest most of the money and participate in the gains of the fund. The general manager usually charges a small management fee and a large incentive bonus if they earn a high rate of return. While this may sound a lot like a mutual fund, there are major differences between mutual fund and hedge fund: 1. Mutual funds are operated by mutual fund or investment companies and are heavily regulated. Hedge funds, as private funds, have far fewer restrictions and regulations. 2. Mutual fund companies invest their client's money, while hedge funds invest their client's money and their own money in the underlying investments. 3. Hedge funds charge a performance bonus: usually 20 percent of all the gains above a certain hurdle rate, which is in line with equity market returns. Some hedge funds have been able to generate annual rates of return of 50 percent or more, even during difficult market environments. 4. Mutual funds have disclosure and other requirements that prohibit a fund from investing in derivative products, using leverage, short selling, taking too large a position in one investment, or investing in commodities. Hedge funds are free to invest however they wish. 5. Hedge funds are not permitted to solicit investments, which is likely why you hear very little about these funds. During the previous five years some of these funds have doubled, tripled, quadrupled in value or more. However, hedge funds do incur large risks and just as many funds have disappeared after losing big.

         
    How to avoid a bad mutual fund

     

    We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all mutual funds hire professional analysts that are 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 the financial reports, you probably won't have as much information to make a decision as a mutual fund manager. Then there is the well documented advantage of diversification. Risk is reduced by holding several non correlated investments. Put simply, some go up, some go down and combined, the return levels off the fluctuations, or risk. Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock. Given the above advantages, it's no wonder that mutual funds have become a very popular form of investing. Now there are thousands of mutual funds to choose 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 may seem like the safe and rational thing to do, but like individual stocks, you want to 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 overall market. You should be looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Read the prospectus closely to understand what these are. 3. Limit the number of funds that you own. Unless you are trying to simply achieve the same returns as the broad market, diversifying into many mutual funds 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. Find more valuable mutual fund resources at best-mutual-fund. info One final point to keep in mind is that the type of fund will totally depend on your investment objectives. There are certain funds that are designed for your objectives be they retirement, income, growth, funding the kids college, etc.

         
    How to look for the best no load mutual funds

     

    Copyright 2006 Michael Saville Low fees and expense ratios. In their search for the best no load mutual fund, some investors tend to select mutual funds based solely on their fees and expense ratios. The rationale is that by choosing mutual funds with low fees, investors can 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. However, 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. Several market experts forecast single digit annual returns for domestic mutual funds over the next decade. Is shopping for the lowest fees and expense ratios the right 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. Investing in the Best No Load Index Mutual Funds. If you believe markets are generally efficient and prefer to invest in an index mutual fund to achieve an index-like return, shopping for the best index mutual fund based on low fees and a low expense ratio makes perfect sense. An index mutual fund's portfolio manager seeks to invest the fund's assets to track an index as closely and as cost-effectively as possible. Larger index funds have an advantage since they can spread their operating costs over a larger asset base. Some of the interesting index mutual fund options currently available include no load index mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index Fund (Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios of 0.09%, 0.10%, and 0.18%, respectively. Investing in Actively Managed Mutual Funds and Strategies. If you believe portfolio managers can add value and out-perform the index through active management, fees and expenses are just one of several important factors to consider. The portfolio manager's ability and investing style are just as important. Therefore, seeking out the best mutual fund based on just low fees and a low expense ratio may not always be the right approach. Ensuring Your Mutual Fund Puts Your Interest First. Whether you prefer to index or take an active approach to managing your investments, ensuring that your mutual fund is putting your interests first is good investing practice. Mutual funds charge different types of fees. By looking at some key factors concerning fees, you can get a sense of whether the mutual fund puts your interests first or merely seeks to line the mutual fund company's pockets. Serving the Interests of Long-Term Shareholders - Some mutual funds impose short-term trading fees to discourage frequent trading of mutual fund shares. Frequent trading disrupts efficient management of the mutual fund and increases operating expenses. A short-term trading fee can therefore actually be beneficial to long-term shareholders if the fee is rightly treated by the mutual fund company. Passing on Savings from Scale Economies - The operating expenses incurred by a mutual fund are a combination of fixed and variable costs. As the assets of a mutual fund increase, the fixed cost gets spread over a larger asset base. Therefore, the expenses incurred to operate the mutual fund as a percentage of the fund's assets should trend lower. A mutual fund that places the interest of shareholders first must pass on the savings from scale economies to shareholders. The trend in a mutual fund's expense ratio therefore serves as a metric of how seriously a fund takes its fiduciary responsibility.

         
    How to pick a profitable mutual fund

     

    We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all mutual funds hire professional analysts that are 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 the financial reports, you probably won’t have as much information to make a decision as a mutual fund manager. Then there is the well documented advantage of diversification. Risk is reduced by holding several non correlated investments. Put simply, some go up, some go down and combined, the return levels off the fluctuations, or risk. Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock. Given the above advantages, it’s no wonder that mutual funds have become a very popular form of investing. Now there are thousands of mutual funds to choose 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 may seem like the safe and rational thing to do, but like individual stocks, you want to 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 overall market. You should be looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Read the prospectus closely to understand what these are. 3. Limit the number of funds that you own. Unless you are trying to simply achieve the same returns as the broad market, diversifying into many mutual funds 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. Find more valuable mutual fund resources at best-mutual-fund. info One final point to keep in mind is that the type of fund will totally depend on your investment objectives. There are certain funds that are designed for your objectives be they retirement, income, growth, funding the kids college, etc.

         
    How to select a mutual fund

     

    One of the most common ways of selecting a mutual fund is to invest with the crowd in today's hot funds. Unfortunately, jumping from one winning fund to another is a recipe for disaster. The mutual funds that the crowd follows typically have had a hot recent performance and tend to gather all the new mutual fund sales. Investors as a whole are primarily allocating their new investments to a small number 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-half of those assets are invested in the largest 100 funds. There are benefits to following the market leaders. Larger mutual fund companies and larger funds have the ability to reduce costs and attract the best professional money managers. However, the biggest limitation is that today's better-selling mutual fund may not be tomorrow's winner. This is true for any mutual fund but it seems to plague the best seller, and the one that garners the most attention, the most often. So buying the equity fund that was yesterday's best-seller isn't a strategy that produces excellent returns. You do not have to go fully in the opposite direction and ignore these hot funds, but you should understand their limitations and strengths. They became best-selling funds because they have merit, but you have to access that merit within your own well-diversified portfolio, and not the crowd's current investment trend.

         
    Investors are finding opportunities beyond their u. s. borders

     

    Experts say global and international mutual funds can represent a world of opportunity for investors. Foreign-based companies now comprise fully half of the world's equity market capitalization, up from about one-third in 1970, and many key industries such as oil and gas, wireless telecommunications and building construction are dominated by foreign companies. However, despite the investment opportunities presented by these companies, research shows that international stocks remain significantly underrepresented in most U. S. portfolios. It's estimated that on average Americans hold only about 5 percent of their portfolios in foreign stocks and funds. Even if they do not realize it, the lives of Americans are influenced by global companies. Perhaps it was the medication taken before bedtime, the car driven to work or the soft drink that accompanied lunch. All are likely to have been products of companies that operate beyond the U. S. According to ING Funds, the U. S. retail mutual fund unit of ING Group, one of the largest financial service organizations in the world, international equity markets offer investors exposure to many key industries that countries other than the U. S. dominate. The mutual fund unit has recently embarked on a "Going Global" campaign to introduce more people to international investing. "ING is working hard to help more people understand how the world of investing is changing," said Bob Boulware, president and CEO of ING Funds. According to Boulware, "Those that are not thinking globally may be missing out." Just as the domestic portion of an investor's portfolio is typically allocated to include a range of investment options, investors may wish to apply that same logic to their international portfolio, selecting an array of sub-asset classes to better position themselves for changing international market conditions. One way to get started would be for investors to consider global and international mutual funds. Global funds can provide exposure to opportunities around the world-both international and domestic. International mutual funds may be better suited for individuals seeking purely foreign holdings to complement their existing domestic portfolio. Among both global and international funds, an investor may want to consider: Market Style. Determine if you are seeking value or growth stocks or a blend of both in your international portfolio. Market Capitalization. Select from small, mid or large "size" companies based on the total dollar value of all its outstanding shares. Specialty Funds. Designed for investors who wish to target their investments either geographically or to include certain key markets, such as real estate. Some investors may wish to consider a fund-of-funds that includes a diversified portfolio of international holdings. An international fund-of-funds gives investors a footing in a variety of important international asset classes with one investment. For example, the ING Diversified International Fund is a fund-of-funds that incorporates a range of international market segments, including international growth, international value, international small capitalization stocks and emerging markets. With underlying portfolios managed by some of the world's most respected international portfolio managers, the fund makes it easier to build international asset allocation into your investment plans. As a recognized leader in global asset management, ING Funds has been focused on providing a mix of global and international investing opportunities for U. S. investors through mutual funds, in part because of its access to more than 700 investment professionals located worldwide with insight into the dynamics of markets in Europe, Asia Pacific and the Americas. The company's latest white paper, "Seeing the Big Picture: A Global Approach to Investing," provides a primer on a variety of aspects of international investing.

         
    Is an index mutual fund the best choice for long term investing

     

    Do you believe that the world economy will grow? Do you believe that US economy will grow? I do. The major stock indexes are indicators of economy grow. You can make money use this opportunity buying index funds. Investing into index mutual funds is easy, interesting, and profitable. It takes 5 minutes every month! If you are long-term investor, index funds is for you! It doesn’t matter what index you choose. This index will grow due to economy sector grow rate. There are many indexes in the world. But how to get money from indexes grow? There are many indexes mutual funds. Fund share price change accordance index performance. There are thousands of mutual funds have S&P 500 as a base of their portfolio. The differences from one fund to other are operating company and expenses. Choose fund with fell known operating company and smallest expenses. Small expenses are very important. If fund have big expenses, the managers steal investors’ money. Index fund manager don’t buy expensive stock market researches, don’t arrive at a difficult decision witch stock to buy. Index fund manager buy stock included into index only. It isn’t expensive! The best investment strategy for indexes mutual funds is to invest some dollar amount monthly. And be the long-term investor – invest for 10 years or more. Our computer modeling of this strategy shows that you will receive profit, if you invest on monthly base during 10 years. I can’t give you guaranties that you will get profit but the probability of this is close to 100%. And the last, if you can, diversify you portfolio. Divide you portfolio into three parts. Buy large capitalization company index fund (S&P 500, DJA), small capitalization index fund (S&P 600) and developed market index fund or international index fund. It makes you portfolio more profitable and more stable.

         
    Is it true that regular index investing performs good result with low risk

     

    There are many mutual funds and ETF on the market. But only a few performs results as good as s&p 500 or better. Well known that s&p 500 performs good results in long terms. But how can we convert these good results into money? We can buy index fund shares. Index Funds seek investment results that correspond with the total return of the some market index (for example s&p 500). Investing into index funds gives chance that the result of this investment will be close to result of the index. As we see, we receive good result doing nothing. It's main advantages of investing into index funds. This investment strategy works better for long term. It means that you have to invest your money into index funds for 5 years or longer. Most of people have no much money for big one time investment. But we can invest small amount of dollars every month. We have tested performance for 5-years regular investment into three indexes (S&P500, S&P Mid Caps 400, S&P Small Caps 600). The result of testing shows that every month investing small amounts of dollar gives good results. Statistic shows that you will receive profit from 26% to 28.50% of initial investment into S&P 500 with 80% probability. We must note that investing into indexes isn't risk-free investment. There are results with loosing in our testing. The poorest result is loosing about 33% of initial investment into S&P 500. Diversification is the best way to reduce risk. Investing into 2-3 different indexes can reduce risk significantly. Best results are given by investing into indexes with different types of assets (bond index and share index) or different classes of assets (small caps, mid caps, big caps). You can find full version of this article with full results of our tests here: fplab/node/116

         
    Market timing with your mutual funds

     

    When investing in bonds, stocks, or mutual funds, investors have the opportunity to increase their rate of return by timing the market - investing when stock markets go up and selling before they decline. A good investor can either time the market prudently, select a good investment, or employ a combination of both to increase his or her rate of return. However, any attempt to increase your rate of return by timing the market entails higher risk. Investors who actively try to time the market should realize that sometimes the unexpected does happen and they could lose money or forgo an excellent return. Timing the market is difficult. To be successful, you have to make two investment decisions correctly: one to sell and one to buy. If you get either wrong in the short term you are out of luck. In addition, investors should realize 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 short time. In short, if you miss one or two good days in the stock market you will forgo the bulk of the gains. Not many investors are good timers. "The Portable Pension Fiduciary," by John H. Ilkiw, noted the results of a comprehensive study of institutional investors, such as mutual fund and pension fund managers. The study concluded that the median money manager added some value by selecting investments that outperform the market. The best money managers added more than 2 percent per year due to stock selection. However the median money manager lost value by timing the market. Thus, investors should realize that marketing timing can add value but that there are better strategies that increase returns over the long term, incur less risk, and have a higher probability of success. One of the reasons why it is so difficult to time correctly is due to the difficulty of removing emotion from your investment decision. Investors who invest on emotion tend to overreact: they invest when prices are high and sell when prices are low. Professional money managers, who can remove emotion from their investment decisions, can add value by timing their investments correctly, but the bulk of their excess rates of return are still generated through security selection and other investment strategies. Investors who want to increase their rate of return through market timing should consider a good Tactical Asset Allocation fund. These funds aim to add value by changing the investment mix between cash, bonds, and stocks following strict protocols and models, rather than emotion-based market timing.

         
    Mutual fund as your alternative investment portfolio

     

    : People 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 invest in an investment portfolio that is able to give a good return and stock market is always the best choice in term of high return. But you aware that investment in the stock market will cause you to lose all your money as well, because the game 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 for an alternative that can give comparatively good reward but with much lower risk than stock. If you are categorized in this group, then mutual fund can be your game. Mutual Fund Is A Risk Sharing Game A mutual fund is simply a financial medium that allow a group of investors to pool their money together with a predetermined investment objective. The pooled money will manage by a fund manager. The fund manager is a person who is widely expert in stock and bond markets. He/she is responsible to invest the pooled money into specific securities, usually stocks and bonds. When you are buying shares of mutual fund, you will become one of the fund's shareholders. All the gains and losses will be shared among the fund's shareholders. Hence, mutual fund is a risk sharing game. Compare to stocks and bonds, mutual funds are one of the cost effective and an easy playing game. You do not need to really expert in stock and bond market because the fund manager will take care of it; and you do not need to crack your head to figure out which stocks or bonds to buy, because you have the expert, 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 the amount of money you plan to invest into the mutual fund. Some mutual funds may 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 or bonds with much lower trading cost. The biggest advantage of mutual funds as compare to stocks or bonds is "diversification". Diversification Will Lower The Risk Investment experts always advise that if you want to invest you money, "Don't put all your eggs into the same basket; else if the basket fall, all you eggs will break", some will happen on your money, if you invest in one stock, if the stock perform negative, you loss all you money. Diversify your investment to spread out your money into many different types of investments. When one investment is down, another might perform in up trend. Hence, with the diversification of your investment, you will reduce your risk tremendously. You can diversify your investment by purchasing different kinds of stocks and bonds instead of one. But it may take weeks to buy all these investments. In contrary, you can get these done by purchasing a few mutual funds and mutual funds automatically diversify your investment across many stocks and bonds. In Summary Mutual fund is a risk sharing investment portfolio, it's provides you a medium of investing your money into a high earning stock & bond market while automatically diversify your investment to reduce your risk. Hence mutual fund can be your alternative of investment portfolio that will give you higher reward and lower risk.

         
    Mutual fund expenses

     

    : An informed investor knows where his money is going. For an investor in mutual funds, it is essential to understand the expenses of mutual funds. These expenses directly influence the returns and cannot be neglected. The expenses of mutual funds are met from the capital invested in them. The ratio of the expenses associated with the operation of the mutual fund to the total assets of the fund is known as the “expense ratio.” It can vary from as low as 0.25% to 1.5%. In some actively managed funds it may be even 2%. The expense ratio is dependant on one more ratio – “the turnover ratio”. “The turnover rate” or the turnover ratio of a fund is the percentage of the fund’s portfolio that changes annually. A fund that buys and sells stocks more frequently 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 money that goes to pay the salaries of the fund managers and other employees of the mutual funds. Administrative Costs: Administrative costs are the costs associated with the daily activities of the fund. These include stationery costs, costs of maintaining customer help lines and so on. 12b-1 Distribution Fee: The 12b-1 fee is the cost associated with the advertising, marketing and distribution of the mutual fund. This fee is just an additional cost which brings no actual benefit to the investor.

    It is advisable that 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 not more than 0.25% of the assets can be paid to brokers as 12b-1 fees. It is important for the investor to watch the expense ratio of the funds that he has invested in. The expense ratio indicates the amount of money that the fund withdraws from the funds assets every year to meet its expenses. More the expenses 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 than compensate higher expenses. For example, a fund having expense ratio 2% and giving 15% returns is better than a fund having 0.5% expense ratio and giving 5% return. Investors should note: It is not sensible to compare returns of funds in different risk classes. Returns of different classes of funds are dependant on the risks that the fund takes to achieve those returns.

    An equity fund always carries a greater risk than a debt fund. Similarly an index fund that invests only in relatively stable and thus less risky index stocks, cannot be compared with a fund that invests in small companies whose stocks are volatile and carry greater risk. 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 expenses usually do not vary much and will certainly reduce returns in future too.

         
    Mutual funds an introduction and brief history

     

    : Each one of us does not have the expertise or the time to build and manage an investment portfolio. There is an excellent alternative available – mutual funds. A mutual fund is an investment intermediary by which people can pool their money and invest it according to a predetermined objective. Each investor of the mutual fund gets a share of the pool proportionate to the initial investment that he makes. The capital of the mutual fund is divided into shares or units and investors get a number of units proportionate to their investment. The investment objective of the mutual fund is always decided beforehand. Mutual funds invest in bonds, stocks, money-market instruments, real estate, commodities or other investments or many times a combination of any of these. The details regarding the funds’ policies, objectives, charges, services etc are all available in the fund’s prospectus and every investor should go through the prospectus before investing in a mutual fund. The investment decisions for the pool capital are made by a fund manager (or managers). The fund manager decides what securities are to be bought and in what quantity. The value of units changes with change in aggregate value of the investments made by the mutual fund. The value of each share or unit of the mutual fund is called NAV (Net Asset Value). Different funds have different risk – reward profile. A mutual fund that invests in stocks is a greater risk investment than a mutual fund that invests in government bonds. The value of stocks can go down resulting in a loss for the investor, but money invested in bonds is safe (unless the Government defaults – which is rare.) At the same time the greater risk in stocks also presents an opportunity for higher returns. Stocks can go up to any limit, but returns from government bonds are limited to the interest rate offered by the government. History of Mutual Funds: The first “pooling of money” for investments was done in 1774. After the 1772-1773 financial crisis, a Dutch merchant Adriaan van Ketwich invited investors to come together to form an investment trust. The goal of the trust was to lower risks involved in investing by providing diversification to the small investors. The funds invested in various European countries such as Austria, Denmark and Spain. The investments were mainly in bonds and equity formed a small portion. The trust was names Eendragt Maakt Magt, which meant “Unity Creates Strength”. The fund had many features that attracted investors: - It has an embedded lottery. - There was an assured 4% dividend, which was slightly less than the average rates prevalent at that time. Thus the interest income exceeded the required payouts and the difference was converted to a cash reserve. - The cash reserve was utilized to retire a few shares annually at 10% premium and hence the remaining shares earned a higher interest. Thus the cash reserve kept increasing over time – further accelerating share redemption. - The trust was to be dissolved at the end of 25 years and the capital was to be divided among the remaining investors. However a war with England led to many bonds defaulting. Due to the decrease in investment income, share redemption was suspended in 1782 and later the interest payments were lowered too. The fund was no longer attractive for investors and faded away. After evolving in Europe for a few years, the idea of mutual funds reached the US at the end if nineteenth century. In the year 1893, the first closed-end fund was formed. It was named the “The Boston Personal Property Trust.” The Alexander Fund in Philadelphia was the first step towards open-end funds. It was established in 1907 and had new issues every six months. Investors were allowed to make redemptions. The first true open-end fund was the Massachusetts Investors’ Trust of Boston. Formed in the year 1924, it went public in 1928. 1928 also saw the emergence of first balanced fund – The Wellington Fund that invested in both stocks and bonds. The concept of Index based funds was given by William Fouse and John McQuown of the Wells Fargo Bank in 1971. Based on their concept, John Bogle launched the first retail Index Fund in 1976. It was called the First Index Investment Trust. It is now known as the Vanguard 500 Index Fund. It crossed 100 billion dollars in assets in November 2000 and became the World’s largest fund. Today mutual funds have come a long way. Nearly one in two households in the US invests in mutual funds. The popularity of mutual funds is also soaring in developing economies like India. They have become the preferred investment route for many investors, who value the unique combination of diversification, low costs and simplicity provided by the funds.

         
     
         
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