January 7th, 2009
Sachin A asked:
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.
Tags: Administrative Costs, Management Fee, Stocks
Posted in Investing | No Comments »
January 7th, 2009
Mayoor Patel asked:
When you have been awarded a settlement due to arbitration or through the order of a judge as a result of a lawsuit, one of the options open for receiving the award is by accepting structured mutual funds. But is this really a smart way to go? The fact is that it can be an ideal way of getting the most from the settlement. Here are a couple of reasons why.
Mutual funds are considered to be relatively safe in most markets. That is not to say that there is no risk involved whatsoever. However, the potential to realize more income from your settlement if it is invested in a mutual fund account is very real. When your situation is such that you do not need the settlement money to handle medical bills or provide revenue to fund home care, it is a very wise move to invest the money in something promises a higher yield than just a standard savings account. If you can manage without having to rely on payments from your settlement to take care of ongoing expenses, this can be a great way to build a nest egg for your later years.
A second advantage to structured settlement mutual funds is that you have some leeway to move the funds around as you experience life changes. This is not true when you are working with a fixed annuity program. There is no way to go back and make any type of changes in your payment structure. If you anticipate some life changes down the road, or even if you don’t but would like to make some changes in the payment disbursements at some point just because you want to, then mutual funds might be the smarter move for you.
Structured Settlement mutual funds are not right for everyone. It is important that you take a long hard look at this option before you agree to anything. To some degree, this means you will need to conduct some research before any firm decision is made. Do not be afraid to ask questions. The goal is to make sure you have what you need to live an equitable quality of life both now and in the future. If you need the money to make that happen now, then by all means set up the payments accordingly. But if you do not have to depend on the payments to meet ongoing expenses, then investing for the future is a smart idea.
Tags: Ideal, Medical Bills, Quality Of Life
Posted in Finance | No Comments »
January 2nd, 2009
Darren Mclaughlin asked:
Most people think of investing in Bonds as being a dry subject, and to a degree, they are right. However, boring can sometimes be a good thing, especially when it comes to investments. Too much “excitement” in your portfolio can lead to undue stress, so a diet rich in bonds and bond mutual funds can help smooth out the rough edges in a portfolio made up mostly of common stocks.
Bonds are generally considered to be less risky than stocks, but they are not without peril in their own right. The risk in a bond is directly related to the issuing company, and the type of debt instrument. Depending on the type of debt issued, and what underlying assets are involved, certain bond investments can be as risky or more risky than investing in stocks. But there’s good news: with a higher risk generally comes a greater return.
Bonds tend to be less flexible to trade than common shares, so most individual investors will end up investing a a bond mutual fund. This has many advantages for the beginning investor, not the least of which is that she can rely on the investment experience of a firm that specializes in analyzing the companies, and their capability of repaying their notes.
The biggest risk associated with bonds is referred to as the interest rate risk. This term refers to changes in the market interest rates, which have a direct bearing on bond returns. Fixed-income securities, in general, move inversely with the changes in interest rates. What this means is that during a period of rising interest rates, like the current climate in the U.S. in 2006, people holding bonds will end up seeing declining bond returns. This will affect long-term issues the most.
In fact, the longer the time to maturity, the greater the risk of interest rate erosion becomes. For this reason, careful pruning of a bond portfolio becomes of greatest interest to the fund manager. One technique bond mutual funds use is staggering maturity dates so that they have less risk based on any one scenario. The great size of the funds allow them to do this easily and quickly.
The biggest risk for any bond holder is the risk that the company will default before making its’ scheduled payments. This is directly related to how credit worthy the company is, and their capacity and will to repay their debts. Companies with lower credit ratings have to pay higher interest rates, just like consumers in the same boat. The worse the credit, the higher the interest rates to bond holders have to be in order to attract investment dollars. Companies with excellent credit ratings pay a much lower cost for capital, which is one of the reasons they have superior credit in the first place!
Whenever considering an investment in a bond, make sure first and foremost that the company has an excellent rating from Standard and Poors or Moody’s. This will ensure they have the capacity to pay back your loan to them over the entire duration of the bond contract.
Tags: Interest Rate Risk, Investing In Bonds, Investment Experience
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December 30th, 2008
dee asked:
What are the top performing mutual funds in India today. Can you please elaborate since i am new to mutual funds and am thinking of investing in one. Also, what type of fund (balanced/equity) would be best suited for a newbie?
Tags: Invest, Newbie, Top Performing Mutual Funds
Posted in Investing | 2 Comments »
December 28th, 2008
Think. asked: I’m talking about less than and up to one year. Please specify reasons why and why not. Any experience is really appreciated.
Do mutual funds make good investments in general?
Tags: Investments, Mutual Funds, Short Term Investment
Posted in Investing | 8 Comments »
December 28th, 2008
The Misses asked:
What is the cheapest way to invest in mutual funds (broker, bank, or mutual fund company)?
Can you suggest something specific?
How expensive is it?
thank you very much. that’s nice of you!
Tags: Invest, Mutual Fund Company, Mutual Funds
Posted in Investing | 6 Comments »
December 27th, 2008
Mark Brandon asked:
The fudging of expertise is appalling in our business. Believe me, I know. I am 35 years old now, and have been in the financial services business 13 years now. When I was 22, fresh out of the University of Texas with a History degree, my first job was with Fidelity Investments as a mutual fund adviser. I passed the Series 6 exam in a matter of days. After a few weeks of training, most of which was listening to one of the more tenured reps (by “tenured”, I mean someone with six months experience), I was on the phone taking calls from all over the country, advising people on how to take care of their financial future. If you had called an 800 number on a prospectus or an advertisement, you would have been speaking with someone like me. Dozens of reps like me fielded calls, and not one of them had more than three years experience. I, myself, only lasted a year and a half in that job. Call center work has a way of burning you out.
In the 1990’s, Fidelity was undergoing rapid growth, and they could not keep the place staffed. They had planned on staffing to a level where no more than five customers were holding at any given time. Shortly after I arrived, we were constantly on “red alert”, which meant that 30 people or more were holding all the time. So, they relaxed their hiring requirements. They had previously insisted on a college degree for their newly hired reps. Soon, I was sitting next to pimply-faced 18-year-olds who had been in a high school classroom only a few months prior. Looking back on it, who was I to feel so superior? It’s not like I learned how to plan someone’s financial future in my “Western Culture, 1865-present” seminar at UT.
Think about that, though. Customers were entrusting their retirement plans to kids. If you go to Fidelity, Schwab, E*Trade, TD Waterhouse, Ameritrade, T Rowe Price, Ameriprise, or any of the other purveyor of mutual funds, and click on their links to “talk to an adviser”, it is usually accompanied by a smiling, healthy, slightly graying middle-aged man with great teeth and his own corner office. In fact, you are more likely talking to a very young, underqualified, underpaid call center worker who barely has a cubicle and is definitely NOT smiling.
Of course, it is true that it does not take grand expertise to do what they do. Back in my day, we were given a script to inquire of a customer’s marital situation, age, risk tolerance, spending goals, and that is it. With that information, there was (wait for it) a Fidelity fund that met their needs. This is how it works at most firms. You need what they are selling. Financial planning requires more than that.
All investment products should be discussed in the larger context of a person’s life — not just financial life, either. If you take no other advice from me, take this one tidbit. If a “financial adviser” is selling you a product from which he is getting paid a commission, he will not have your best interests at heart. Period.
Tags: Fidelity Investments, Series 6, Td Waterhouse
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December 23rd, 2008
James asked: Which one do you prefer, Mutual Funds or ULIP ? Which is Better for short term investing?
Can you Explain 3 Major Differences Between the two?
Tags: Mutual Funds, Short Term Investing, Ulip
Posted in Investing | 5 Comments »
December 22nd, 2008
Muna wa Wanjiru asked:
There are many different mutual funds companies for you to invest with. Since each of these has many different options you may want to look in to doing a mutual fund comparison. The comparison of various mutual funds and the many stocks and bonds that can be found in a mutual fund will show you which ones are suited for investment. One of the best ways to accomplish this is to select about 2 to 3 different mutual funds companies.
Look to see what types of funds they are offering and how these funds are distributed. While this may take some time it is best to know the differences that can be found. You can then check in the financial news how these same stocks and bonds have been performing over a certain set period of time. There is one item that you should keep in mind when you are doing a mutual fund comparison.
As the stock market has a tendency to fluctuate, the values of stocks and bonds in your portfolio may rise and fall according to what is happening in the market. You will have to be prepared to take this risk if you are doing any investing in mutual funds. One of the best ways to prepare for this is to see what the expenses are that can be affected by a fall in the stock market.
In a mutual fund comparison you will find most of these expenses are ones that we seldom think about. For instance you will find that your stock gets affected by the fees and expenses which are generated to the investors. A high fee charge will over time pay less money to you. Whereas a low fee charge will provide you with a higher return. You can use a mutual fund cost calculator to see what you will have paid in return to you.
The size of the fund and the age will also need to be examined in a mutual fund comparison. Most new mutual funds have really great performance records due to their short term operating.
This picture can get changed as time passes and the fund increases. To remedy this shortcoming you can check how a mutual fund has performed over a long period of time. You will also need to make sure that you have taken into account the ups and down periods that a fund will go through.
There are other factors which will need to be investigated in a mutual fund comparison. A few of these include ones like the volatility of the fund, the recent changes which have occurred to the fund, how the diversification will affect your mutual fund portfolio.
By looking at all of these factors and others which you may consider important it will be easy to decide what type of mutual fund you want to invest in. A mutual fund comparison is one of the better ways that a client can decide which mutual fund to invest in.
Tags: Investing In Mutual Funds, Portfolio, Stocks Bonds
Posted in Finance | No Comments »
December 22nd, 2008
shaun moore asked:
I am looking for cheap growth stock mutual funds. It doesn’t have to be mutual funds. I am twenty one years old and I do not mind much risk.
Tags: Cheap Stock, Growth Stock, Twenty One Years
Posted in Investing | 3 Comments »
