Archive for the ‘Investing’ Category

What Is A Mutual Fund and How To Invest In Them Successfully

Thursday, September 13th, 2012

Many people don’t even know what is a mutual fund, let alone investing in them. If you are one of them, don’t worry because you are going to learn everything about them. A mutual fund is an investment firm run by professional money managers. They collect money from thousands of investors like you, and then wisely put that money in various investments such as stocks, bonds, futures, money market funds to create a portfolio. Mutual funds put your money in different baskets, thus minimizing the risk.

When you purchase stocks, you own a part of the company. Similarly, when you invest in a mutual fund, you’ll become a “shareholder” in the mutual fund company. When the mutual fund makes money, you’ll get dividends (profits on the money you have invested). However, the value of your shares will decline in case there are losses.

Open-ended vs. Closed-ended Funds

Mutual funds are of two types – open-ended and closed-ended. The open-ended funds are further subdivided into load and no-load funds.

A large number of mutual funds are open-ended, i.e., they issue shares whenever an investor wants them and redeem the shares if an investor decides to sell. Since the shares are issued and redeemed as necessary, they reflect the actual value of the fund.

Contrary to open-ended, closed-ended funds have a set number of shares issued for public in stock exchanges. These shares can be purchased or sold in the open market. Closed-ended funds do not issue new shares or redeem as necessary. Therefore, their prices are based on the law of supply and demand.

We discussed that open-ended funds are of two types. Loads and non-loads. Simply put, load is sales commission added to the mutual fund share prices when you purchase it. Usually it is charged by the fund sales person, and can go up to 8.5 percent of the sales prices.

Most of the mutual funds are no-load type. That means you won’t have to pay any sales fee to anybody. The mutual fund directly markets to potential investors, so there is no sales person involved. No-load funds generally yield better returns because they carry lower expenses.

Benefits of Investing In Mutual Funds

Well, the biggest benefit is that it heavily minimizes the risk. Investors who don’t know much about the stock market or money management can put their money in the hands of some reliable, professional money managers. Mutual funds constantly monitor every investment in their portfolio, and they buy or sell whenever the time is appropriate.

Additionally, they devote much more amount of time on selecting investments than any individual investor. Investing without calculating the financial ratios or analyzing the security give you peace of mind, and provides you the opportunity to spend your time on something you love.

Since the compensation of money managers at a mutual fund is directly tied to performance of the fund, they always ensure an effective growth.

How To Choose The Right Mutual Fund

When looking for a mutual fund that fits your portfolio, you have to consider three things: your purpose behind investing, investing style and risk tolerance. Some people invest to buy a new home in the future or for retirement purpose. Your purpose of investment and the kind of returns you expect will define the risk tolerance. Everybody has a different investing style and strategy. Some like investing in start-ups, others invest only in blue chip companies or s specific sector.

Once you choose a mutual fund, go to S&P or Morningstar. I personally prefer the data from Bloomberg. They rank mutual funds based on their past records. You can rely on the rankings, but be careful if the fund manager has changed recently at the mutual fund of your choice.

You should be aware of the factors that will help a particular mutual fund perform better in the future, and why it should be a part of your portfolio. The technique I use to know these things is that I simply ask fund managers what is the position of their current portfolio and how they plan to outperform in the future.

How To Invest In Mutual Funds

People with a brokerage account can purchase shares of a mutual fund just like they do for stock purchasing. If you don’t have a brokerage account, don’t panic. You can directly contact the mutual fund to request information and application form, or visit their website.

Usually, mutual funds put a minimum limit on initial investment. It varies widely from $25 to as much as $100,000, but most of them are in the range of $1,000-$5,000. Mutual funds have made investing very easy with multiple payment options and a minimum amount of paperwork.

Can you add something to the list? If you are an experienced mutual fund investor, how did you get started? Enlighten our readers with your story.

Learn How To Invest Your Money

Tuesday, September 4th, 2012

When you hear your friends and colleagues talking about their latest stock picks, do you wonder how they know all that stuff? Even the idea of investing seems scary for people who don’t know how to invest.

Many people think that investing is only for the rich class. That’s not true. You can start investing with as little as $200. In fact, it is better to start investing at the earliest and see your money multiplying, thanks to the magic of compound interest. You just need to learn a few basics in order to reap the benefits.

Beginning of Investing Basics: Set Goals

The first step is to pen down the kind of returns you expect on your investments. It will give you a direction when deciding to put money in various instruments. For example, if you don’t want to take any risk and are happy with the low returns, the most appropriate choice for you would be a term deposit or online bank account. However, if you want reasonably high returns, direct share purchase and mutual funds will be suitable for you.

“If you’re investing your money for a particular objective, clearly state the objective before you start investing. You may be investing for your child’s college education, your retirement or any other purpose. The level of risk you have to take entirely depends on two things: the objective and time limit,” says Matt Krantz, a financial reporter and author of Fundamental Analysis for Dummies and Investing Online for Dummies.

When setting goals, be realistic. It’s worthless to pour money in stocks, bonds or mutual funds if your credit card carries a heavy debt at high interest rates. Get rid of the credit card debt first. Also, ensure that you have at least 3-6 months of expenses in your emergency fund.

Investment Instruments

As a beginner, you should be aware of the most common investment instruments: stocks, mutual funds and bonds.

When you purchase stocks (shares), you get partial ownership in the firm. As a shareholder, you will get a part of the company’s total profits every year, called dividend. However, people usually don’t invest in stocks to get dividends. They expect the stock prices to rise over time. Stock prices fluctuate based on the company’s perceived value and its net value on the paper. The success mantra to invest in stocks is to buy at low prices and sell when the prices go up.

Another tool is mutual fund. A mutual fund is run by the professional money managers. It collects money from thousands of investors like you and then purchases a portfolio of stocks, debts, bonds and other securities. The biggest advantage of mutual funds is that your money is invested in a diversified portfolio that reduces the risks. If one company in the portfolio loses money, the gains from other companies will make up for the loss, thus yielding a decent return.

Professional investors consider bonds one of the safest investments. In simple terms, bonds are a type of loan where the investors lend money. A common example is our Treasury Bond or T-bill. The investor is directly loaning money to the US government when she buys a T-bill. There are other types as well, such as corporate bonds, municipal bonds, etc. Since they are extremely safe investments, bonds yield very low interest rates.

Choose a Broker

Before you start investing, you have to open a brokerage account. You can’t directly trade the stocks, bonds or mutual funds. You have to tell your broker which item to buy or sell, and they will charge a “commission” for their services. Their fee ranges from as low as $5 to hundreds of dollars.

There are two types of brokers: traditional brokerages and discount brokers. Traditional brokers offer a wide range of services such as advising on the instruments and companies suitable for you. Discount brokers charge a much lesser fee, but they do only what you tell them to. They do not offer any advice, so they are more suitable for self-directed investors. Brokerage firms like Charles Schwab and Merrill Lynch offer both types of services, allowing you to choose the format you like. Some of the most popular discount brokers are TD Ameritrade, E-Trade Securities and TD Waterhouse.

Nowadays, you can also find many online brokers who fall in the middle of traditional and discount brokers. They charge $15-$30 per trade, but offer you good support and guidance.

Know The Strategies

The best investment strategy is diversification. Spread your money over several instruments to reduce the risk. Usually, when one investment is yielding higher returns, the others may be plunging. By putting your money in a number of investments, you are likely to yield decent returns even if one investment take a downturn. Billionaire investor Warren Buffett says, “Do not put all your eggs in one basket.”

Build Your Portfolio

Now that you have learned the basics of investing, it’s time to build your portfolio of well chosen instruments. Your portfolio should consist of stocks, mutual funds, bonds, REITs and other instruments. Aim to diversify your portfolio, so that you won’t lose everything even if you make a mistake.

Let me know if this was helpful to you. My goal is to provide my visitors with useful and helpful money management tips so that you can obtain your financial goals. Leave a comment below. I’d love to hear from you.