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Mutual funds are one of the best
investment ever created for individual investors. But before you can
understand what a mutual fund is, it is important that you have a basic
understanding of stocks and bonds (Check out our Stocks
and Bonds Section). A mutual fund is nothing more than a collection of stocks and/or bonds
managed by an investment company. Mutual fund brings together a group of people
and invests their money in stocks, bonds, and other securities. Therefore,
several hundred million to a billion dollars are invested along with your
money by the company. Each investor
owns shares, which represent a portion of the holdings of the fund. Mutual
funds are one of the best investments ever created because they are very cost
efficient and very easy to invest. You also get the same level of
professional management of your money without having to have millions of
dollars.
The total return on mutual funds are based on three things:
1) Income - Income is earned from
dividends on
stocks and interest
on bonds. To distribute the income it receives over the year, a fund pays
nearly all of this income to fund owners in the form of a dividend. With
mutual funds, you have a choice of either to receive a check for
dividends and distributions or to reinvest the earnings and get more shares.
Dividends are taxable whether or not you reinvest them as additional shares in
the fund (unless they come from tax-free municipal bond fund or it's a
retirement account)
2) Capital gains distributions - If the fund sells securities that have increased in price, the fund has a capital gain,
which is usually paid to investors in the form of a distribution. Funds
typically pay one annual capital gains distribution in December, but
distributions can be paid multiple times per year. As with dividends, capital
gains are taxable whether or not your reinvest them in additional shares in
the fund.
3)Share price change - You also make money with a mutual fund
when the share price increases. This happens when fund holdings increase in price but are not sold by the fund manager
(thus, not incurring capital gains),
the fund's shares increase in price. You can then sell your mutual fund for a
profit.
Advantages of Mutual Funds:
• Professional Management - Mutual funds are managed by a portfolio
manager and research team who screen the universe of investments for those
that best meet the stated objectives of the fund. Investors
purchase funds because they do not have the time or the expertise to manage
their own portfolio. A mutual fund is a relatively inexpensive way for a small
investor to get a full-time manager to make and monitor investments. Some
managers will guide the fund to a sterling performance for so long that the
managers practically become a celebrity. Warren Buffett, who practically runs
Berkshire Hathaway, returned to investors average annual return of around 30%
for over 35 years (Berkshire Hathaway is a stock traded on NYSE, but since it
owns quite a bit of private and publicly traded companies that it's sort of
like a big mutual fund). Another good example is Peter Lynch, who retired from
Fidelity Magellan fund in 1990 after 13 years of returning it's shareholders
with over 29% annual gain. Other funds bear the names of founders who
established their credentials as stock market gurus before starting their own
mutual funds. John Templeton, and Mario Gabelli are good examples.
• Automatic Diversification - The most basic level of diversification is to buy
multiple stocks and/or bonds rather than just one. Mutual funds are set up to
buy many stocks and/or bonds. By owning shares in a mutual fund instead of owning
individual stocks or bonds, your risk is spread out. The idea behind
diversification is to invest in a large number of assets so that a loss in any
particular investment is minimized by gains in others. In other words, the
more stocks and bonds you own, the less any one of them can hurt you. Large mutual funds often own over 100 stocks in many different
industries. It wouldn't be possible for an investor to build this kind of a
portfolio with a small amount of money. Mutual fund investing enables you to
achieve high level of diversification with the highest possible return at
lowest possible risk.
• Liquidity with Low cost - With mutual fund you can convert your
shares into cash at any time. Because a mutual fund buys and sells large
amounts of securities at a time, its transaction costs are lower than you as
an individual would pay. You can avoid paying sales commissions (known as
loads) by buying no-load mutual funds. The most efficiently managed stock
mutual funds cost less than 1 percent per year in management fees (It costs
even less usually around .20 to .50 of a percent to invest in index funds).
• Flexibility - Among the thousands of mutual funds, you can choose a
risk level that is comfortable to you. If you are investing for a long
term such as retirement, you may want to invest more heavily in stock funds.
If you are retired already and want income, you may want to invest
conservatively by putting your money in bond funds. And with a money market
fund, you are sure not to lose your invested money (known as principal). You
may also mix and match different type of funds to meet your financial goals.
• Simplicity with minimal investment - You can buy and sell funds
through a broker, a bank , by mail or online. Buying a mutual fund is easy!
Just call the 800 number to get the forms and sent a check to that particular
mutual fund company (such as vanguard) or you can open a brokerage account
with a discount broker
(such as Waterhouse Securities) and buy hundreds of mutual funds from
different mutual fund companies. Almost any big bank also has its own
line of mutual funds, and the minimum investment is small (especially for
retirement accounts). Most companies also
have automatic purchase plans whereby as little as $100 can be invested on a
monthly basis.
• Automatic reinvestment of earnings and payment Plans - Dividends,
interest and capital gains distributed by mutual funds can be automatically
reinvested for you in more shares. Reinvesting earnings should be a crucial part
of your investment goals for the long term. Also with mutual funds, you can
receive regular income from your shares at fixed interval. If dividends and
interest aren't enough to cover the payments, the fund will sell enough shares
to cover them.
• Easy access to information - Prices for mutual funds are published in
the newspaper everyday, just like the prices of the stocks and bonds. You can
also see their results over periods ranging from a month to ten years in list of
magazines that publish comparative fund performance information in every single
issue. Money and Kiplinger's Personal finance Magazine publish a
monthly list of top performers in various categories. Majority of the funds have
a toll-free numbers you can call to requests information about the funds and
mutual fund companies are required to sent you a prospectus (contains almost
everything you want to know about the fund: fees, past performance, it's
objective, etc.) before selling you any shares. Majority of mutual funds will be
happy to hear from you, especially if you are a shareholder.
This book is an excellent guide to the world of mutual
funds. Eric Tyson does a service to beginning investors by steering them
towards the modest goal of getting the same return as the market by
investing in low-fee, low turnover mutual funds (preferably index funds).
Tyson covers nearly everything in this book, from how to build a
portfolio, to what returns you can reasonably expect, to where to buy the
funds. He covers stock funds, bond funds, and money market funds, and
shows how you can evaluate them.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
