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Tuesday, January 5, 2010

Managed Mutual Funds Vs Index Funds

Those of you who have just started investing may have heard the terms "actively-managed mutual fund" and "index fund" thrown around by personal finance advice columnists, bloggers, and the financial media. This financial jargon may sound like Greek to you, and intentionally so, since the financial media needs for investing to seem difficult in order to continue selling newspapers and magazines. The truth is, investing is easy, and learning the difference between actively-managed and index mutual funds could very well be your first step towards financial prosperity.

The Two Flavors Of Mutual Funds

Mutual funds basically come in two flavors: actively managed and index. Both own a diversified portfolio of stocks or bonds and both pool the money of millions of investors around the nation into one large fund, giving investors wide diversification for a relatively small amount of money.

Actively managed mutual funds are the more glamourous of the two. Managed funds have one goal: to obtain above-average returns, often paying hot-shot managers outrageous sums of money for a shot at winning big. So what's the problem? Unfortunately, the vast majority of actively-managed mutual funds fail to outperform the market, which is usually measured by the S&P 500 index. That doesn't stop them from charging large fees, however. Actively-managed funds are like going to Vegas: you could win big, but you probably won't. In most cases, you'd be better off not trying.

Index funds, by contrast, merely seek to match the market. For example, an S&P 500 index fund will merely buy the same stocks in the same proportions as the index and leave it at that. Since they don't have to hire expensive managers, index funds are very inexpensive relatively to actively-managed funds, and generally outperform them as well due to that same cost advantage. The downside is that it is impossible to outperform the market. With index funds, you have to take your pick: would you prefer average returns with no shot of beating the market using index funds or mostly below-average returns with a shot at above-average returns using managed funds? Vanguard is the company responsible for inventing index funds and is still by far the most respected in the industry.

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Monday, December 28, 2009

Mutual Funds to Avoid

Mutual funds are a great way for most investors to invest in stocks, bonds and the money market. Some are better than others, and some should be avoided altogether.

You should not be trying to hit a home run when you invest in funds. Rather, your objective should be to participate in the markets to get overall returns that are higher than you can make at the bank, and more consistent than you could get by playing the stock market or bond market on your own.

To give you some perspective ... historically, over the long term stocks and stock funds have returned about 10% to 11% a year, bonds closer to 5% to 6%, and the safest investments (like T-bills and savings at the bank) have averaged about 3%. Over the past 50 to 80 years, inflation has averaged about 3% a year as well.

Avoid mutual funds that do not have well-established track records. Why take a chance on a fund that has not proven itself? If you want to take chances, play the market. Every mutual fund's literature tells you when the fund was established, and shows its historical performance.

Avoid funds with erratic performance records. For example, you want your largest stock holding to be a stock fund that pretty much tracks the stock market. If the market was up 10% for the year and dividends averaged 2%, you should want to feel confident that your fund returned about 10% to 15% ... rather than maybe +25% or maybe -10%.

Avoid stock funds that are "non-diversified", unless you are investing in a sector or specialty fund that concentrates on a specific sector (like gold stocks or real estate stocks). You want the lion's share of your stock money to be in DIVERSIFIED funds that invest in many different companies across the different industry sectors.

Avoid mutual funds with high yearly expenses and fees! Expenses are taken directly from fund assets, and work to lower investors' returns. A mutual fund with low expenses might return 10% in a given year. An identical fund charging over 2% a year for expenses would return closer to 8%. A bond fund with high expenses could return 4% in a given year instead of 5% due to high expenses and fees.

Finally, avoid mutual funds that have sales charges whenever possible. These sales charges are called LOADS. The most popular mutual funds that have sales loads are called Class "A" funds. Here's how they work.

You write out a check for $20,000 to invest in a stock fund with an up-front load (sales charge) of 5%. Right off the top $1000 goes to pay sales charges. Your investment is worth $19,000.

Once you really understand mutual funds and investing, you can save a lot of money by simply buying NO-LOAD funds on your own. Now you pay NO sales charges, and can invest with LOW expenses once you know the ropes.

After all, a penny saved is a penny earned.

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Friday, December 18, 2009

Advantages of Index Mutual Funds

Investing in index mutual funds can be a great way of making profits. Actually the said funds are considered a type of mutual fund wherein a collective investment scheme is utilized. Index funds basically invest in specific kinds of stocks which belong to a particular index in the stock market.

Actually the said funds are available from various investment mangers. The good thing about the investment is the little involvement of human decisions. Most index funds rely only on computer models. That's why a passive management can be seen in this type of investment. In purchasing or selling of stocks, you don't have to consider too many factors.

Just depend on the computer model and you're through with it. The best thing with index mutual funds is the absence of active management. You don't have to keep track of all the stocks in the financial market. The most common indices used are S&p500, FTSE 100 and others. With the absence of active management, it brings about lots of benefits to the investor. You will truly appreciate investment in index mutual funds in the forms of its advantages. First advantage is the simplicity in the investment procedure. You can easily understand the trade even though you are only an amateur.

Managing your investment can be made easy. Once you've understand the objective, all will be easier for you to deal. The most important thing is determining the index target. When you can identify the target, you will then know what securities to hold. In addition, you don't have to pay lots of attention to the fund. Upon establishing a target, you'll feel confident in your investments. Just as long as your investments closely mirror the market as a whole, your investment will be safe. You don't have to worry a lot whether you'll be losing or not. Second, the fees you will be paying are totally low.

This is due to the fact of the lack of active management. This is really good news to people who are thinking on investing in index mutual funds. Moreover, in the said fund, the quantity is known pertaining to the composition of the target index thus running the fund is easier for the manager. The fund manager will then be imposing a much lower fee compared to other kinds of investments to the investors. They don't have to do lots of research with regards to the fund. Charging a lower fee is thus appropriate Third, there are no possibilities for drifting in styles.

If you will notice, other kinds of mutual funds easily drift styles. When we mean drifting, it connotes getting out of the desired style. The bad thing about drifting is the reduction on the diversification of the portfolio. By reducing the diversity, the risk in your investment will therefore increase. But in case of index mutual funds, there's no room for that- diversification of portfolio is even increased in this manner. If you really want to invest in mutual fund, choose index fund instead of others.

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Sunday, December 6, 2009

Mutual Fund Investment With Zero Entry Load

If any investor makes investment in any mutual fund scheme, in India, through broker it attracts entry load normally @ 2.25%. The broker gets commission from Asset Management Company normally @ 2% to 2.25% or even more depending on the performance of the distributor. Since the entry load is deducted investment amount reduces to that extent.

Why investor is investing through broker is that he believes that broker is providing him advice for selection of right mutual fund scheme, he expect after sales service and off course marketing skills of broker. In the interest of Investors Securities & Exchange Board of India has issued guidelines according to which if anyone invests directly through Fund House in Mutual Fund Scheme there shall be NO ENTRY LOAD will be applied. It means entire amount will go to investment.

These guidelines are certainly beneficial for the investor. But only 5% of Investors are availing this facility, mainly because investors do not get after sales service from the fund house. In addition to it those who are aware of the market and mutual fund are generally opting for direct investment. If investor gets advice plus value added services with option of availing no entry load facility he will certainly think for the same.

It is the best option available for investors to invest in Mutual Fund without paying any charges for the same. Some brokers have already started giving this facility to their investors of making investment without paying any entry load in this case they only expect from the investor to transfer their direct investment through the concern broker.

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Wednesday, November 18, 2009

Best Performing Mutual Funds - Tips to Finding the Top Mutual Funds to Invest In

Mutual funds are an excellent investment vehicle and should seriously be considered as part of your portfolio if you want to be a successful investor. The benefits of finding the best performing mutual funds will allow you to diversify your investments while significantly reducing your risk.

While the current trend is to simply look at the past performance of a particular fund, this method simply does not work as what was successful in the past may not work as well in the future. Even looking at trade volume is a poor indicator of how well a mutual fund will perform.

So given these circumstances, how can you absolutely determine the best performing mutual funds? The short answer is that the best mutual funds will depend on what you intend to invest in whether it is a fund that specializes in stocks or bonds, and also how much risk you're willing to take.

With that said, there are several companies that analyze in detail thousands of available funds and assign them rankings based on very specific criteria. One such company is Morningstar that uses a simple star rating system to rate particular funds based on past performance and current trading value.

Another place to finding the best performing mutual funds is Lipper Leader Fund ratings which is similar to Morningstar but does things a little bit differently. They use five criteria in rating funds from total return, consistent return, preservation, tax efficiency and expense.

These factors combined helped to draw up a better picture of how well a mutual fund has performed in the past and how likely it is to perform in the future. In addition, there are also business periodicals such as Business Week and the Wall Street Journal that offer invaluable insight into popular mutual funds.

The bottom line to finding the best performing mutual funds is to thoroughly do your research behind a fund that you are interested in and combining data from different sources as to whether the fund is a smart investment. Which fund you invest in ultimately depends on you.

One of the most essential factors is doing thorough research into the board of advisory. Be sure that they have a track record of proven success and that they have adequate experience.

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Friday, November 6, 2009

Great Things About Asset Allocation Funds

Asset allocation funds can be a great way to approach investing because they allow you to benefit from the movements of stocks, while at the same time avoid the volatility they come with.

They do this by investing in other asset classes such as bonds as well as stocks. Some of the major benefits are.

1. Escaping volatility

Stocks can be very volatile and that can be very risky at times. So if you just buy a portfolio of stocks and the market crashes you could lose a large chunk of your portfolio. But if you had a diversified portfolio between both stocks and bonds a market crash might not affect you as much.
Bonds can be used to help you get through a bears market.

2. Diversified

How many times have you heard about diversification? Well that is because it works for a long term portfolio. The first thing you need to consider is risk so if you only invest in 1 asset class you are going to hold a high amount of risk.

If all you have are stocks and they start falling all of a sudden your portfolio is going to go down with it. This can be used for bonds too. A more diversified approach gives you a better long term outlook.

3. Some Funds Can Switch

Some Asset Allocation funds can switch from investing primarily in 1 asset class to another. So if stocks start outperforming bonds you can switch into being more heavenly waited on invest in stocks which can help you benefit from changes in any market.

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Sunday, October 25, 2009

Today's Financial Crisis Was Predicted Almost 50 Years Ago, But Few Believed Or Understood

There's a real problem with mutual funds and the investment industry that promotes them. Understanding how the mutual fund industry is hurting your future isn't hard, but the solution is even simpler.

In this article, I'm going to introduce you to the source of problems in today's mutual fund industry. The place I'll start is someplace that you may not think is connected, but it is. I'm referring to a speech that was given on January 17, 1961. President Dwight D. Eisenhower had been running our country, and this was his farewell address to the country. This was a pretty dramatic moment. He had nothing to lose, no political office or fundraising to worry about. It was a moment of truth. Here, almost 50 years later, his speech is still remembered. It was really striking at the time.

He was warning us of a rising problem that he called the "military industrial complex." As a former general of the US Army, he really had a front row seat to the workings of the military. And then, of course, he was not a general but also Commander-in-Chief for eight years. From his front-row seat, he watched the massive buildup this country was undergoing in regards to the industrial complex. He talked about how this sector was intrinsically prone to moral hazard.

If you don't know what "moral hazard" means, it's when someone is protected from the risk or downside of his or her own actions. In other words, there is no negative consequence to their self-serving actions. As you might imagine, this can lead to very risky practices. This is true not only in the military or industrial military world, but also in the financial world.

Given Eisenhower's background, many people were stunned that he specifically used that term, "moral hazard," or even talked about this as a problem at all. He also described about how the military-industrial complex was prone to what is called "principal agent" problems. That's when the person you hire to help or protect you is more aligned with his or her own self-interests than yours. It's also a nice way of saying crooked. All this sounds familiar when you consider what has been going on at Wall Street and the financial world.

The third term he used was "rent seeking." That's when you hire someone who then makes money unfairly by manipulating the system he is operating in. This amounts to lying so skillfully that almost everyone buys it. Even the liar may come to believe it. Even so, it's still a lie.

President Eisenhower saw this happening in the 1950's, and he was quite concerned about it. This is also a very good description of what's been going on in the U.S. since the 1980's.

Now, in general terms, Eisenhower was talking about defense contractors when he talked about the military- industrial complex. But in a broader sense, he was also talking about the Pentagon, the Congress and the Executive branch. It's very similar to what's going on today, a kind of "industrial-investment complex." In the 1950's, 1960's, and 1970's, the industrial-military complex was putting the US at risk of collapse. And in the 1980's, 1990's, and 2000's, it's the industrial-investment complex that is more dangerous to the stability and safety of this country. The industrial-investment complex is not only Wall Street, but also credit card companies, banking companies, insurance companies, Congress and the Executive branch. They're all in on it. The SEC, the Commodities Futures Trading Commission, the Treasury and the Fed are all involved here. No one wants to admit it, but they're all systematically part of the problem.

If you are serious about making your money grow, then you have to understand how this complex works against you. It's not so much a conspiracy as a powerful force that moves against your wealth.

How the problems we heard about from Eisenhower were repeated is another topic, but we didn't learn from them. So we continued the pattern of greed and deception, and that laid the groundwork for where we are today. The conventional methods, ideas, and approach to wealth are crumbling. The status quo is rapidly changing. You have to ask yourself which side of the bursting bubble you want to be on, because there are always two sides.

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Wednesday, October 14, 2009

Buying Mutual Funds - Be Fooled Or Be Angry

Over the years, practices that hurt mutual fund investment results have become more and more common. The only protection is to understand and to act on this information. Modern mutual funds are typified by something I call mismanagement fees. These are expenses that don't have to happen, that aren't called fees, and aren't deliberately deceptive, like ones I've written about elsewhere. But these are kinds of fees, nonetheless. These fees reduce the growth of your money, with no penalty for anyone but you. They're typical of the industry, and really are a kind of mismanagement of your money.

There are two types of fees I will describe in this article. I'll call the first one "hyper-trading fees," and it includes everything negative that comes with that practice.

About hyper-trading fees: The first mutual fund ever started was started in 1924. For fifty years, they did things differently. From the second half of the 1920's up through the 1970's, trading by the mutual fund managers just wasn't done that frequently. The average stock was held for 6 years. Another way of saying it, turnover of investments was only about 7% a year. Then came the shift. And that shift was called the 401(k). From the 1980's and 1990's until now, trading frequency changed.

Today we have a turnover of 100%, meaning the average time a fund manager holds a stock is for a year or less. There are some mutual funds that even have a 200% or 300% turnover ratio. That means on average, they're only holding onto stocks for four to six months. They're no longer investing. They're no longer being prudent, doing due diligence, and looking for long-term results. They've become day traders.

Now, why should this matter to the investor? Well, there are a couple of reasons. For every 100% of turnover in stocks each year, there's about a 1% additional expense that gets added to an already-high management fee. An additional 1% expense, when it applies to an industry that manages $10 trillion, is huge, $100 billion huge. When numbers get that big, it boggles the mind.

The size of the numbers tells you, first, why there's so much energy put into making this look like they're taking care of the investors' interests when clearly they're not, and second, this tells one that when there's a problem with the system, it adds up fast. A portion of expense relating to hyper-trading comes from the taxes on holding stocks so short. Every trade that results in a gain gets taxed. So when trades happen this fast, the tax applies over and over and over, compared to holding on to stocks longer.

Here's another one: A fund manager routinely moves hundreds of millions of dollars, and sometimes even billions of dollars, in and out of a stock. Because of this volume, they're basically bidding up the price of the stock when they buy. What could be worse than buying a stock for more than it's worth? This: Same factors, same results, only in reverse when they sell. So the effect is doubled. They're pushing the price of stock down when they sell. Because of their size, they can pay more; at the same time, they're getting a lower price when they sell.

This hyper trading is absolutely hurting the returns that investors get on their money.

John Bogle, who founded Vanguard, does a lot of research on the mutual fund industry. He did a study from 1980 to 2005. He found that over this period, the S&P 500 grew an average of 12% a year. Then he looked at mutual funds' investment results for that same time period; over the same time period, mutual funds grew at 10% a year, 2% less. At first blush, 2% may not seem like that much. But a lot of little things add up to big things. This is one of those big things. Banks get rich by understanding the difference of a couple of percent over the years. You can too. Multiply the results over that period, and you find that these mutual funds end up not making an additional 2% a year for 25 years. That will earn the investor 44% less money over 25 years. Instead of making $1,440,000, the investor only makes $1 million over the same time period, a difference of $440,000.

The reason for that difference is the fees: hyper-trading fees, direct brokerage fees, fund supermarket fees, pay-to-play fees; basically, mismanagement fees. Without knowing this going in, it will be difficult to protect your money.

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Friday, October 2, 2009

Take the Mystery Out of Mutual Fund Jargon

We all know what it's like - you finally have some time and start reading, or you find a Web site that looks inviting and you come face to face with words, phrases, acronyms and technical terms that are just foreign to you. What do you do? If you're like most people, you forge ahead and try to discern and understand the intent and meaning of words and phrases that aren't in your everyday vocabulary, and then you kind of give up. Obviously that's not going to help achieve your investment objectives, goals and aspirations.

Here are a couple of examples that may help to illustrate the point. What's a "fed wire?" Should there come a time when you might need money quickly you can have cash sent to you overnight with a fed wire. This procedure involves the Federal Reserve System which is able to transfer monies form one bank to another overnight. The custodian of your fund is almost invariably a commercial bank and a member of the Federal Reserve System. By making arrangements in advance you can set up your fund account to use a fed wire to transfer money from the proceeds of a redemption (which you can arrange by phone) and send the proceeds to your bank where it will almost always be at your bank, in cash, the next business day. It's easy to do, just contact your fund's transfer agency (that's the shareholder service organization that maintains all of the records of all the shareholders of the fund you own).

Let's take it a step further and get a little more technical. What's the difference between ARMs and CMOs? Don't worry, it has nothing to do with either fingers or toes. The point is that there may come a time when having a convenient source or glossary of commonly used mutual fund terms may be helpful to you in arriving at a more informed investment decision. There's no doubt that you really can't know too much about anything that affects your financial future and well being.

A final note - has anyone ever spoken to you about a mutual fund withdrawal plan? You may have heard a great deal about how and which fund to invest in, but what about a system that allows you to withdraw a specific amount of money from your account either monthly or quarterly, which amount you can change or stop at any time (often with a simple phone call). Well, it can be done and many people enjoy this convenience while maintaining full control of the amount and frequency of regular, periodic cash withdrawals.

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Friday, September 25, 2009

Best Mutual Fund - Finding Your Investment Success

There are thousands of different mutual fund combinations out there. Finding the best mutual fund, therefore, might prove to be a challenging task in your eyes. What if I told you right now that I have the answer to that question? What if I could tell you the exact best mutual fund to invest in this second? Well I can, but I guarantee the answer will surprise you.

The best mutual fund to invest in is the one that suits your needs. That's right. There's no magic answer, no 'secret fund' that all the millionaires are using. The great thing about mutual funds is that they're fully customizable, and they offer instant diversification. Having a mutual fund allows you to invest a little bit of money into a lot of things, giving you better options for success all around. If you invest $2,000 in one or two stocks, you're taking a huge risk. While the reward might be worth it, the crash definitely will not. Invest that $2,000 in a mutual fund and you'll have your pick of investments. What exactly is in a mutual fund? I'm glad you asked.

A mutual fund can consist of many of the following investments:

-Real Estate

In addition to these things, mutual funds can also include other investments. With your $2,000, you'll get a little slice of any of these that you want, depending on which mutual funds you consider, and how you choose to diversify your money. This might all seem like a lot to take in, and you might very well be wondering how in the world you're supposed to keep track of all this information. You need to take in what you can on your own, and then see a financial professional to help you choose the best mutual fund and learn how to best invest your money.

Mutual funds are easy to invest in, and you can choose from two different types so that if you don't want to pay heavy fees like you would with stock investments, you don't have to. You can even get professional picks on the stocks in your mutual fund for FREE, when it would cost you hundreds or thousands to research before you invest in stocks alone. You're certainly not going to prove to be 100% successful every single time, but having free professional picks certainly can't help. If you want to learn more about mutual funds, find a financial advisor near you today.

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