Tag: mutual fund

  • How to invest in a mutual fund

    How to invest in a mutual fund

    4 min read

    How to invest in a mutual fund

    To invest in a mutual fund, you can buy into a mutual fund through a mutual fund company, bank, or brokerage firm (similar to stocks).

    Typically, funds are either equity funds (investment in stocks), fixed income funds (investment in bonds), or money markets (kind of like cash).

    You will have to consider what is the minimum threshold for investing in the mutual fund. Because different funds have different investment minimums.

    Also, you will have to decide if you want to invest in a load or no-load fund.

    This means you will either be paying commission or not. But regardless of if you invest in a load or no-load fund, you’ll still be paying some fees. So, you have to factor that in when deciding.

    And, it is really simple to invest in a mutual fund.

    You simply determine the amount of money you’d like to invest in a mutual fund over the phone, online, or in person. There are so many options today.

    Online brokers generally often offer more diverse selections. However, you will have to open an individual retirement account.

    There are several expenses to account for. Like, transaction fees accumulated when investing in a mutual fund, early redemption fees if you wish to sell a fund in the first 60 to 90 days, and expense ratios that are a percentage of your investment.

    You can make money off of your mutual fund by selling it for more than you paid for it. Or through a variety of distributions like dividends or interest that can be paid out throughout your investment. However, most mutual funds will reinvest dividends for you unless you specify otherwise.

    Can money invested in mutual funds be lost?

    We will try to keep it simple. If you have invested only in mutual funds, theoretically the money can be lost.

    Reasonably – it depends.

    Well, investments are time unstable. So, at some period, your portfolio can hit the loss.

    But over the long period in time, the odds of losing your money are close to null.

    Yes, there might be accidents like some major market breakdown which could destroy your collected profits notably. But, in most cases, it is for a short time and markets would recover and your investment too.

    Let us explain.

    During the 2008 financial crisis, the fall in stock prices led to near 50% decline in the portfolio value of many people nearly throughout the world. Many people had panicked because this was a huge story. But, inside a one year, the portfolio value jumped back to its 100%. So, if some investor was really holding till today, it would be extra up 50–60% at least. In short, the possibilities of losing in the long-term are very small when investing in mutual funds.

    Take a look at this chart:

    Why Mutual fund is opportunity 

    Let’s do some math.

    You invested $100 and holding it for 10 years earning 15% CAGR = $404.5.
    You remember from the previous lessons: CAGR is the compound annual growth rate (CAGR).

    Some breakdown in the 11th year decreased prices by half – $202. But, this is still a return of 7.3%.

    The risk, if you are forced to sell here is not reaching your financial intentions and considerably it will influence your habits if you are retired.

    But what we can learn from the history of the present business world? The value of assets has jumped back to healthy from the critical after the great depressions.

    One note more. Instead of focusing on the systematic investment plan (SIP) a better choice is a focus on the systematic withdrawal plan (SWP). That’s the point where you begin to take out your money from risky assets. You are close to your goal and place in secured assets.

    So, the chances of not reaching your financial aims are reduced.

    The note: Mutual fund investments are subject to market risk.

    You have to keep this in your mind forever when investing in mutual funds. There are no investments without some risk associated with it.

    Missing or getting the money depends completely on the investment period an investor picks.

    We will show you how it looks in one more chart. We aimed out the period of big crisis 2008, in the red circle.

    Why Mutual fund is opportunity  1

    For example, you invest $1,000 for a day or two. If the stock market slips the preceding day, the value of your $1,000 will surely not appreciate.

    Also, if you invest the same amount for a week and the market is in a downtrend throughout that week, the invested money will not yield any profit.

    If you choose to stay invested for a year or more than that, though there is no guarantee, there is a possibility that your $1,000 may go up as a long-term investment horizon is always likely to give better results.

    In other words, you won’t lose all your money.

    Money can be lost mostly due to wrong timing.

    When the market is bullish, people invest aggressively. When the market corrects, people get scared and they take out money when the market is down or sideways.

    Say, investing in stocks through mutual fund route is a safer way to putting in money in the ever-volatile stock market. In a mutual fund, your investments are managed by professionals, who ensure the protection of your capital.

    Past trends have shown that usually mutual funds are profitable giving an average return of around 10-12%.

    Mutual fund investments become even safer and convenient if done via SIP (Systematic Investment Plan) route. SIP is a type of investment set up whereby rather than putting in a lump sum, you put in small amounts of money either in monthly, quarterly or annual installments. This, in turn, enables the fund to benefit from the power of compounding and also isn’t too much of a burden on the investor.

    risk disclosure

  • Select Mutual Funds By Using Relevant Criteria

    Select Mutual Funds By Using Relevant Criteria

    How to Select Mutual Funds
    Examine fees and exit loads, read the offer document, analyze portfolio and holdings but here is a lot more.

    By Guy Avtalyon

    When starting to make the investment decision it’s important to know what criteria to use to know how to select the right mutual funds. If you don’t know anything regarding mutual funds and you are interested to invest in mutual funds, you are always confused about where to begin.

    That’s the beauty of investing in mutual funds! You do not need to be an expert or even a finance freak to start investing in mutual funds.

    One of the most frequent questions is how to select the right mutual funds to invest in.

    Who manages mutual funds?

     

    Mutual funds are managed by professional managers.

    But not all funds are equally well. There are many funds that are not able to beat the index. That’s why it’s really important for you to select the right mutual funds that will fulfill your investment goals.

    Most beginners just look at past performance while researching the best mutual funds to invest. But there are two equally important factors to be checked before selecting any fund: The objective of the fund matches your investment goals and what are the different risks associated with the fund.

    Mutual fund investing is a long-term ratio. It’s different from the direct investment in stocks, where people can change the stocks fast, mutual funds are a long time task. Most people hold their funds for over 8 even over 10 years. Hence, it’s important that you choose the right fund and avoid ones that might result in you to lose both time and money.

    How to select the right mutual funds?

    I’ll show you, step by step.

    Read the offer document: One of the most voluminous documents, also known as the prospectus. The first and the biggest step while choosing a mutual fund is to read the offer document. From the top to the bottom.

    There you can find all the important details like the fund’s objective, scheme type, past performance, details about the asset management company, classes of the underlying assets, etc. It’s not difficult to understand these documents.

     

    Match the goal of the fund with your own. Every mutual fund has a specific aim. And based on that aim, they decide different factors like asset allocation (equity to bond weight), risks, dividend payouts, tax benefits, theme/sector focus, etc.
    You have to read the offer document of the fund in order to identify whether the fund aims to meet your investment needs. If their aims are not pertinent to you, it might not be the right option to invest in those funds.

    Examine fees and exit loads. The mutual funds will charge a fee for their services and to meet different expenses. This expense ratio can be  2-2.5%. Some mutual funds may charge you a fee upfront when you invest (entry load), or a deferred sales charge when you sell your shares (exit load).  As a value investor, you should stay away from mutual funds with high fees and loads to avoid unnecessary costs.

    What criteria to use to know how to select a mutual fund?

    Examine the past performance of the fund. The past performance of a fund isn’t a guarantee of how well it will perform in the future. But it will give you an approximate idea about the returns and expectations. You should compare the funds’ past performance to the benchmark because it will give you a better idea of its actual performance. Stay focused on long-term performance (3 years or greater) and compare it with its competitors and index.

    What else can you do?

    Analyze portfolio and holdings. This may be a little tricky for new investors. The main question is how will you understand whether the holdings are good or bad? The key point is to make sure that the fund is investing in the type of securities in which you are interested. Analyzing the portfolio will give you a good idea if the fund is the right fit for you or not. There is also another trouble while analyzing the portfolio and holding. The portfolio can be changed from time to time. The manager may choose to buy or sell securities because the managers are independent. And if you are not regularly reviewing the fund, the current allocation might be a little different from the time when you invested in the fund. That’s why you should always review your fund every six months after purchasing to confirm that fund achieves your goals.

    Check your fund manager. The fund manager is the one who makes all the major buy/sell choices on your behalf. That’s why you have to find out more about the fund manager. Find how long this fund manager is handling the fund. Check if the fund manager has other funds for managing. If the other funds are also doing alike good, then it is a good sign. But if just one fund is performing well, while the other funds are struggling, then it might be a problem.

    Check the credentials of the fund house. You do not want to get involved with a troublesome fund house which might bring you problems.

    The procedure to select the right mutual funds to invest requires a careful study of the fund. To whom you can trust? Better make your own decisions based on examinations.

    And a very important note: Do not rush with investing. There are hundreds of mutual funds in the market. Take your time to analyze them and find out the one that best suits your goals.

    Happy Investing! 

     

  • What is Mutual Fund Investment?

    What is Mutual Fund Investment?

    What is Mutual Fund Investment?
    Can mutual funds give you better returns, are they safer investment choice, what are types of mutual funds? Read all here.

    By Guy Avtalyon

    A mutual fund is a company that puts together money from many people and invests it in stocks, bonds, or other assets. The investment portfolio of a mutual fund is a combination of stocks, bonds, and other assets. When an investor acquires shares of the fund becomes the owner of the part of these holdings.

    Mutual funds investment can give you a better return in a much safer way

    The performance of mutual funds depends mainly on the fund manager who manages the fund on your behalf. Making the decision based on knowledge, picking a well-performing fund manager is utterly important to your success. For all of that, you should need some basic information on mutual fund investment.

    OK, you own the mutual funds comprising a collection of stocks and bonds. That is your upper hand.

    Why? First of all, it allows you to buy in with notably less money than it would take to purchase the same portfolio of stocks/bonds on your own. Second, you spread the risks out there among a group of investors if something goes wrong.

    How the mutual fund portfolio is structured

    It isn’t one single stock or bond of one sector alone. Therefore you can reduce your risks of losing your money to a greater extent. Always keep in mind that you may be the worst loser in the stock market due to a periodical deep cut in share prices. True is, there is no full-proof method or strategy that is completely safe and without risks. That’s the fact. But, mutual funds have lower risks than many other investment options. This makes them suitable for novices, traders who lack proper knowledge and skills in the investment market.

    Mutual funds often have much better rates of return than the average savings account at the local bank.

    Besides that, you may have minimum risks in this type of investment compared to other more risky ventures.

    Even more, if you have some idea of which sectors are performing well, you are at an advantageous position of choosing a good sectoral fund. But be cautious, you should select a well-rated company. Diversification is the key to a healthy portfolio and mutual funds will help you get a diversified portfolio.

    This is one of the safest ways to invest your money in the long term if you are young enough and in no hurry for retirement because the most mutual funds do not have the high payoffs that many investors seek to include for their retirement planning.

    What are the main types of mutual funds?

    Essentially, there are three types of mutual funds with some variations on each:

    Money market mutual funds are an open-ended mutual fund. These types of funds invest in short-term debt securities. This is regarded as safe as bank deposits yet providing a higher yield. These funds are great for long-term investors. This slow and stable access to investing is better than leaving your money in an interest-paying savings account.

    Equity funds that may provide slow growth over time with some income along the way.

    Fixed income funds are created to provide a current income. This is great for those who have retired or for investors who are extremely conservative.

    Besides this, you need to have certain basic knowledge about diversifying your portfolio of rated mutual funds. That can give you an attractive return with the highest safety. In a roar bull market, investing in Diversified Equity Fund is the best option (60% of the total fund), then comes Balanced Fund (20%), followed by Midcap Fund (10%), Small-cap Fund (5%) and Liquid Fund (5%). If you’re a conservative trader, you may opt-in Debt Fund. But if you’re optimistic, you can go for index funds as a systematic investment plan. Index Fund can deliver you a very profitable return in a bull market. Why? Because index fund includes highly rated performing stocks with diversified sectors and reliable.

    One of the benefits of investing in a mutual fund is that offers professional investment management and potential diversification

    Ways to earn money by investing in a mutual fund:

    Dividend Payments. A fund earns income from dividends on stock or interest on bonds. The fund pays the shareholders almost all the income, lower for expenses.

    Capital Gains Distributions. The price of the securities in a fund may grow. By selling a security that has increased in price, the fund has a capital gain. At the end of the year, the fund shares the capital gains, lessen by any capital losses, to investors.

    Increased NAV. When the market value of a fund’s portfolio rises, the value of the fund and its shares increases also. If the NAV is higher the value of shareholders’ investments will be higher too. NAV is calculated by adding up the current value of all the stocks, bonds, and other securities, including cash, in its portfolio. Then, subtract the manager’s salary and other expenses, and then divide that result by the fund’s total number of shares.

    All funds carry some level of risk. It is possible to lose some or all of the money you invest. The reason is obvious, the mutual fund holds securities that can decrease in value. Dividends or interest payments are also changing along with changes in market conditions.

    A fund’s past performance is not important because past performance does not predict future returns. But past performance will never tell anything about the future performances but can tell you how volatile or stable a fund has been in the past. If you find a fund had more volatility, that is a sign that there are higher investment risks.

    Every mutual fund must file a prospectus and regular shareholder reports, that’s by the law. Read the prospectus and the shareholder reports before you invest. Also, the investment portfolios of mutual funds are managed by investment advisers. You should always check that the investment adviser is registered before investing.