Archive for September, 2008

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Creating a Mutual Fund Portfolio

Tuesday, September 30th, 2008
Bob Guy asked:


Managing your assets is an important step towards creating your own personal wealth. You can research and figure out on your own which investment products can work for you. Hiring a professional financial advisor can be very beneficial as well. Money market funds are great for short-term investments that need to remain liquid. They earn an average of three times more than traditional savings accounts. If you are looking for long-term investments, consider mutual funds.

There are thousands of mutual funds to choose from, but don’t be discouraged. First find a company that you like. Their policies should be congruent with your needs and your lifestyle. Some charge fees and offer financial advice. Some are fee-free and can offer you education over the phone to help you make your own choices. Just about every company will help you assess your risk tolerance and guide you in the right direction. When choosing mutual funds, you should consider diversifying your portfolio. Use your best judgment and try not to put all of your eggs in one basket, so to speak. There are a few basic categories of mutual funds you should know about before investing in the funds that will best suit your needs.

Some mutual funds are made up of investments in mostly bonds and other fairly stable instruments. These can be great for conservative investors that don’t want to see their balance fluctuating wildly. They concentrate on slow growth and are fairly stable, although you should never count on any investment making money. If you have a few years to wait before you’ll need your money, then investing conservatively may be an appropriate choice for you. You can spread out your money over a few different bond funds to diversify. If you believe that you may need your money sooner, then you may want to stick to very conservative bond funds or money market accounts. They are more liquid and rarely have negative years. Keep in mind that any mutual fund can experience negative years, so consider the length of your investment and what it will be used for before investing.

Moderate funds are made up of some bonds and some stocks. Stocks are more risky and can create a higher or lower return than bond funds alone. Moderate funds can range from being heavy with bonds to being comprised mostly of stocks with a few bonds to stabilize them a little. You may consider moderate funds for longer term investments, as long as you can stomach watching your balance go up and down on a daily basis. Your initial investment isn’t totally safe in any mutual fund, but growth is generally higher in moderate funds if you have many years to invest. Keep in mind that as time goes on, you’ll approach the time when you need your investment. As retirement or your other goals get closer, you may consider moving to a more conservative investment. Any time that you move your money from one fund to another, it is a taxable event. In the year that you move it, any growth above and beyond your initial investment is taxable.

Stock funds are the most aggressive types of mutual funds. They can fluctuate a lot more than other types of funds, either making great profits, or experiencing great losses. These types of funds may look enticing to investors seeking high returns, but keep in mind that the percentages you see are long-term results and can vary greatly from year to year. You should only invest in stock funds for very long-term investments, and only if you can withstand the major fluctuations of the stock market.

When diversifying, keep your goals and risk tolerance in mind. You may choose to spread your investment over many types of funds. Keep track of your investment portfolio and seek professional advice whenever possible.



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What Stocks, Mutual Funds, or Bonds should I pick for a mock investment class?

Monday, September 29th, 2008
l0ewen asked:


I am taking Fin 320 at ISU right now and I am doing some research on what to invest in. I need to maintain a diversified portfolio, obviously a good idea anyway. I was just curious if anyone had any good ideas on what to invest in, including what industries, in this bullish market. I have $1,000,000 to invest and although I know mutual funds will probably have the greatest returns right now, I am looking to learn from this experience and try different ideas while I have the opportunity.

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I have some very conservative investments, mostly mutual funds. What will happen to them in a deep recession?

Sunday, September 28th, 2008
“Kh a a a a a n n” ! ! asked:


I have some mutual funds which are made up of very conservative investments - nothing too risky. Over the past few decades this fund has done nothing but grow slowly. Sometimes it goes down a bit, sometimes it spikes a bit, but overall it shows a pattern of growth, which is great.

What will happen to these investments if we go into a bad recession?

Will they decrease in value a lot?

Should I try and head this off by changing my portfolio? Or just ride it out?

Thanks!

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Why Invest in Mutual Funds

Sunday, September 28th, 2008
ANIRBAN GUHA asked:


Why invest in Mutual Funds?

Let us first define the concept of Mutual Funds. These are funds where money is collected from investors to form a common pool and then deployed into various asset classes (equities, debt instruments etc.) to meet some stated investment objective. When you buy shares of a company, it makes you a part owner of the company and its assets. Likewise if you subscribe to a mutual fund you become a part owner of the fund’s assets.

Mutual funds, as an investment option is really advantageous compared to other investment avenues particularly when the capital to be invested is small and the scope for an investor to carry out detailed market research is minimal. The advantages are as follows-

1) Diversification of Portfolio: Mutual funds invest in a well-diversified portfolio of securities. This enables an investor to hold a diversified portfolio irrespective of his invested amount.

2) Diversification of Risk: As investments are made in a well-diversified portfolio, the risk of investing directly in one/two shares or other debt instruments also gets reduced. Any loss in particular companies or sectors gets off-set by gains made in other companies or sectors

3) Benefit of SIP: SIP stands for Systematic Investment Plan. This allows an investor to invest regularly with whatever small amount one can invest, without worrying to time the market.

4) Professional Management: The persons running a fund are professionals who have got the skills of managing the money as well as technical tools and the much-needed research works behind them. So one can be sure that the money is in safe hands.

5) Reduced Transaction Costs: When one invests directly, he has to bear all the costs such as brokerage or custody of securities. Here the mutual funds enjoy “ Economies of Scale”, as the funds pay lesser costs due to trading/investing in larger volumes.

6) Liquidity: Mutual funds are highly liquid. One can sell the units to the fund, if it is an open-ended or one can also sell the units in a stock exchange, if it is a closed-ended fund.

7) Wide Investment Objectives: Usually one can opt for growth or dividend options from the same scheme of a mutual fund. If one wants to accumulate wealth, he can go for the growth option and if he needs regular income out of his investment he can choose the dividend option.

8) Various Services: Mutual fund companies provide various services e.g., one can easily transfer/switch their holdings from one scheme to another. Buying/selling of units can also be done through internet, email or other means of communication. The fund houses also provide updated market information.

Although certain disadvantages are there, but investing in a mutual

fund is worthy. The shortcomings are a) there is no direct control over the decision of fund managers in day-to-day running of various schemes; b) investors have to be happy with the common portfolio of the scheme irrespective of one’s personal risk appetite. However taking into account the various benefits that an investor enjoys in a mutual fund makes it a much better option than the other investment avenues.



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How exactly does mutual funds work?

Monday, September 22nd, 2008
ratmforever asked:


Hello, as a beginner investor how do you actually earn money from mutual funds? I heard that it’s not about compounding interest and that it’s about the NAV on the day you wish to withdraw the funds that will determine your profit?

I had a perception that it was like time deposit, that your initial investment will earn interest and interest is added up to your initial investment and it will compound over time only that the interest rates varies every time. This is not the case in mutual funds right or is it?

Can someone enlighten me on this? Thanks.
Note: I know what a mutual fund is at least it’s general idea that it’s composed of diversified investments managed by a fund manager. My question is how do you earn technically? Is it like compounding interest or not?

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Top Mutual Funds in India

Sunday, September 21st, 2008
Ryan Crown asked:


 

Deciding or searching for the top mutual funds generally requires lot of things to be taken into consideration. It is here that the role of the fund manager creeps in. The fund manager determines the performance of the fund for that particular period, so it is a compulsion that he is consulted prior to making the investment. Another important segment that should be taken care of is the proper selection of Assets. Asset Allocation is the art of bifurcating your finances into a mixture of Assets (stocks, bonds, etc). It is imperative that some amount of research is done prior to choosing a fund for investment. The performance of a mutual fund over the last few years does give an insight to it’s value. The Mutual fund performance can be known by Mutual Fund NAV i.e. Net Asset Value. It is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. It is necessary for all top mutual funds in India to put their NAV’s on the web site of Association of Mutual Funds in India (AMFI) thus the investors can access NAVs of all mutual funds at one place.

 

.According to latest researches and data available with Association of Mutual Funds in India (body that governs the Mutual Fund houses in India) , it can be described that, since the last 6 months, the entire asset under management or AUM, along with thirty one mutual funds covered at Rs 5,18,123 Crore or Rs 5,181.23 billion. All of the top five mutual funds of India made record in the development of total AUM. They have increased the AUM rate of the Indian mutual fund industry. Being the top mutual fund organization of India, the Reliance Mutual Fund rose the AUM to Rs.80,780 crore from Rs.77,765 crore. On the other hand, the ICICI Prudential Mutual Fund and UTI Mutual Fund rose to Rs.56,854 crore from Rs.52,180 crore. So going through the snapshot you do have an idea as to which Mutual Fund should be invested upon and the factors you would need to take into consideration.

 



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Mutual Funds: Low Risk Yet High Return

Sunday, September 21st, 2008
Bob Janeway asked:


Why do we invest money in a particular busines? It is a question that you should answer first before you start any kind of business. Succesful investors always remember to include every detail on their planning activities– and they have answered every vital question that they should address first.

You invest money for profit. Thus, you need to consider investments that can give you a high return. You might consider gambling your capital in a stock market, where every cent can be doubled or tripled, depending on market conditions. Since stocks could be easily acquired and sold, it is one of the viable options that you may consider in choosing an investment portfolio.

However, a high return may also come with high risk. Do you remember the unwritten rule “high risk yet high return” and “low risk yet low return”? It is true that investing in the stock market may give you a huge profit, but expect your capital to be at a high risk. Unstable market conditions might cause you to lose all of your money.

If you do not like taking high risks, the stock market is not an ideal investment for you. You may look for an alternative that could give you the same return but with lower risk than investing in stocks. If you are under this category of investors, then you might consider investing in mutual funds.

Mutual funds are a good alternative for investors who do not want to take the risk when getting a huge profit. It is a “common fund” or amount of money pooled by a group of investors with a definite investment objective. Such pooled money would be managed by a fund manager, an individual who specializes in different types of investments, such as bonds and stocks. He would be the one responsible in managing and investing the pooled money in different securities.

In mutual funds, all profits and losses will be shared among the fund’s shareholders. In other words, all profits as well as losses will be shared among the group according to the percentage of individual share in the fund. For instance, if you are a group of five investors, investing $20,000 each, making your mutual fund to be worth a hundred thousand dollars. All profits as well as losses would be distributed on a 20-percent basis, thus reducing all possible risks.

Aside from the low-risk feature of mutual funds, you need not to be an expert in stocks or other forms of securities. The fund manager would be the one to take care of it. In addition, you can diversify your capital and spread it to other types of investment. Diversification means spreading all of your money into several investments. In case one investment is down, there are other investments that you can concentrate with. Thus, you will not be losing all of your money in a single investment as well as maximizing your potential profit through other types of investments.

The mutual funds will automatically diverse your investment across bonds or other securities. Again, the fund manager would be the one to handle all transactions and determine if it is viable for you to invest on that particular security.

Form a pool of investors and combine all of your capital into a single mutual fund. Share the huge profits out of diversified investments as well as enjoy the reduced-risk feature that comes along with it.



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Reasons to Fire Your Mutual Fund Company - Enablers of Poor Corporate Governance

Friday, September 19th, 2008
Mark Brandon asked:


An entire book could be written about the happy conspiracy between corporate managers and the investment community that pads both pockets at the expense of the everyday shareholder. In fact, one has been written. You should check out “The Battle for the Soul of American Capitalism” by John Bogle, the founder of the Vanguard Group. Bogle has been one of the few mutual fund industry luminaries that publicly decry the abuse taking place. It is an easy read. Check it out. Many of my top ten reasons are touched on in this book.

Over fifty percent of corporate America is owned by the top 100 financial fiduciaries. One would think that this alone would make them the most vigilant voices in the boardroom. In fact, few mutual funds demand accountability from management, and in many of the most egregious cases, they are guilty of downright aiding and abetting the fudging of numbers and the looting of otherwise good corporations. Why? Two glaring conflicts of interest prevent the industry from becoming the activists that they should become.

First, every company is a potential client for 401k and pension administration. Over half of invest-able assets are in defined contribution plans (401k, 403b, etc) or defined benefit plans (pensions). Company management gets to decide who handles these assets on behalf of their employees. Corporate managers who take a dim view of shareholder activism (and who does, except those that are abusing shareholders?) are unlikely to award this business to institutions who meddle too much. Management wants shareholders to blindly follow the recommendations of management. Shareholders who file corporate resolutions and offer up competing board slates are not likely to get a piece of the company’s investment assets.

The second conflict is similar to the first. So many of the mutual fund industry’s parent companies also have operations in investment banking. They are reluctant to raise hay because offending their management clients may result in their firms being left out in the cold when it comes to investment banking deals.

This is really a shame. Mutual funds have the expertise, the resources, and the position to demand accountability from management. Instead, management has used the diffusion of corporate ownership to increase their pay, fudge the numbers, cut sweetheart deals, etc. Bogle calls this a transition from “owners’ capitalism” to “managers’ capitalism”.



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