1. Your Questions About Mutual Funds
Mandy asks…
Mutual funds?
I have a small amount of money I would like to invest. I have heard of mutual funds but what
are they? how do you get them? how much do they cost? how much money can you make from
them? Is there a certain amount of time you have to wait before getting the money from them?
Do they require any "upkeep"? Anything else I should know about mutual funds?
Do you have suggestions for other easy investments that would be better than a mutual fund?
Sorry for so many questions but i would really appreciate someone knowlegedable to help me
out. Thanks!
Steve Winston answers:
Here's What I Know About Mutual Funds!
(I’m only 16 so I hope I can be some help but here is what I know for fact.)
Mutual funds are investments that pool the money of many investors and place it in stocks,
bonds, and other holdings.
Mutual funds are the most common investment vehicle for individuals because they don’t
require a lot of money to get started. They carry some other advantages as well.
When you put your money into a mutual fund, you’re throwing your money into a pot with
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2. another couple hundred million dollars or so.
A portfolio manager and a team of researchers are responsible for finding the best places in
which to invest the money. While a portfolio is a group of investments assembled to meet an
investment goal, a portfolio manager is someone who is paid to supervise the investment
decisions of others. The managers get paid for their services from a fee within the fund, usually
a percentage of the value of the fund. Although you don’t see this fee, you should remember
that it exists. The terms “portfolio manager” and “money manager” are used interchangeably.
Both handle the management of a portfolio, be it for individuals or for a mutual fund. They are
paid a percentage of the assets under management.
In addition to the portfolio manager’s fee, there are several other fees you need to be aware of
when deciding which mutual fund is right for you:
1. No-load mutual funds let you avoid paying a sales commission on your transactions. No-load
funds are shown by advisers who receive compensation otherwise, often by an hourly rate. The
companies that offer no-load funds have toll-free phone numbers that you can call for
recommendations of what funds to buy.
2. Load mutual funds pay sales commissions to a broker, financial adviser, insurance
consultant, and so on. The load, or a portion of it, is paid to the adviser who recommends the
mutual fund to you. If your mutual fund has a load, know how much it is and how you pay it.
Fund loads/fees should be reviewed by the salesperson and stated in the prospectus
(paperwork) sent from the company. Load funds have front-end loads, deferred sales charges,
or back end loans:
2A. Front-end loads are fees paid up front.
2B. A deferred sales charge permits the load to be postponed, and it gradually declines over a
period of years until the sales charge is 0.
2C. A back-end load means you pay a set fee upon the sale of the mutual fund.
Mutual funds can offer you some great advantages:
1.Money can be taken directly from your bank account each month and transferred into a
mutual fund. This makes investing nearly painless.
2.Mutual funds can offer “diversification”. (Diversification is investing your money in different
securities in different industries hoping to protect your investment against one or more
companies undergoing financial disaster.) If you are “diversified”, and one or more of your
investments hits a slump, then you can rely on your other investments to boost your total
portfolio. You could, for instance, divide your money among three or four different types of stock
funds, ensuring that you’d always have some money invested in a profitable area of the market.
Part of diversification is also investing in bonds, as well as different types of stocks. It can be
difficult for you to plan that diversification on your own, which is why people look to mutual funds
to diversify their portfolios.
3.It doesn’t cost much out-of-pocket to buy mutual fund shares. If you purchase a no-load fund,
you do not pay a sales charge buy the fund. “Brokerage” for the investments within the mutual.
Fund, or the cost of buying or selling shares of the stocks or bonds, are generally far lower than
standard brokerage, because the fund managers buy or sell so many shares of a security at
one time and buy and sell frequently. Having this power enables them to negotiate traders for a
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3. lot less money than you could on your own. Many people assume that mutual funds do not pay
to trade securities, but that’s a false assumption. Fees occur whenever a security is traded;
although the fees are usually lower inside a fund, due to the large number of shares traded.
4.The Securities and Exchange Commission (SEC) oversees the records and expenses of all
mutual funds.
5.You can direct almost any amount of money to where you want it. If you’re into a mutual fund
for the long haul, you can direct your money to funds that invest more heavily in stocks instead
of directing your money to the more conservative bond funds.
If you’re looking for mutual funds that don’t require a lot of money to open or to be contributed
to each mouth, consider the following options. They all were given high ratings by “Morningstar
Mutual Funds”, a newsletter published twice a month by Morningstar, Inc. In Chicago:
American Funds: 1-800-421-0180 www.americanfunds.com
Fidelity Funds: 1-800-Fidelity www.fidelity.com
Oakmark Funds:1-800-Oakmark www.oakmark.com
T. Rowe Price: 1-800-638-5660 www.troweprice.com
Vanguard: 1-877-662-7447 www.vanguard.com
One final advantage of mutual funds is that they carry almost no risk of going bankrupt. Due to
diversification within a fund, a mutual fund is very unlikely to lose its entire value.
Take a careful look at mutual funds as you begin to think about investing your money. They’re
a great place to start investing and are an excellent vehicle in which your money can grow.
If you decide mutual funds are not for you, you can always invest in real estate (if you are
wanting long-term investing). You can invest in stocks or bonds also.
Go to your nearest book store and purchase “The Complete Idiot’s Guid To Personal Finance
in Your 20s and 30s Third Edition”. It has helped me understand everything about personal
finance. The book is a great guide.
(Let Me Know If I Was Of Some Assistance)
James asks…
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4. mutual funds?
what is the definition of MUTUAL FUNDS?
are there any additional terms of MUTUAL FUNDS?
how does MTUAL FUNDS work?
what are the advantages/disadvantages of MUTUAL FUNDS?
Steve Winston answers:
Mutual funds are a group of stocks managed together by some party. It allows the smaller
investor to participate in the diversification of the stocks held in a mutual fund w/o actually
having to purchase each and every stock for oneself.
That said, mutual funds are appropriate for some and the wrong investment for a increasingly
growing number of people.
For me, I would NOT invest in mutual funds if it weren't for having a 401K.
Overall, Mutual funds are not good (once you're educated in investing) and many people should
not invest in mutual funds unless you have to (like if it were a requirement in a 401K).
Here's why.
First of all, mutual funds exist to take average person's money.
Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's
often the gauge. A monkey, yes monkey, can usually outpick most mutual funds. Over 60% of
the mutual funds out there can't even outperform the market (CNBC just reported the current #
was 72%). That's VERY SAD!
Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees
are 0.5% to 2% annually. This is one of the reasons they can’t outperform the market; they take
a cut out regardless of how well or poorly they do!
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5. Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT
"losing" you lots of money. That way you stay with them and they continue to collect their fees.
Did they not highlight to you that they take this fee each and every year regardless of how
poorly they do?
Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush
talks in the morning and you call your broker to sell because the market is now tanking, the
broker will gladly take your order, but the order will not be executed until the day is over and the
negative impact is already priced into the fund.
Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of
time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from
the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of
your money as well.
Seventh, mutual funds have to be in the market. So if the market is crashing or going down like
it has between May and now, then the funds still have to be in the market and taking those
losses too. With some practice, you can time your monies to avoid some of those losses (it'll
take practice).
Convinced yet? Need more?
Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they
are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into
just the sectors you want, like metals, or housing, or energy, etc. Or right now, Brokers/Dealers,
Retail, and insurance!
Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund
with $10 billion in assets. 1% of that money is $100 million. How many companies are this big
where $100 million investment isn't the whole company? Do you want to limit yourself to just
those larger companies like Times Warner, Microsoft, home depot, Cisco, Ebay which have
been sideways for years? I think not.
A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks,
so are very liquid, and do not have the high fees like the mutual funds. Further, you can buy/sell
them as you wish. They represent sectors or indexes, so buying them gives you the same
diversification as the sector/industry/index, but with much less overhead!
See Amex.com (american stock exchange) or ishares.com, holders.com for more info.
You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the
shortcomings (and as you can see, there are many).
Let me know if you have further questions.
Best of luck!
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6. Linda asks…
Mutual Funds?
I need to know the Advantages and Disadvantages of mutual funds
Steve Winston answers:
This has been a rather common question is this forum. I am surprised the Yahoo folks have not
featured it.
Advatages:
1 diversification
2. Low initial investment for participants
3. Many flavors to choose from
4. Well evaluated by Morningstar
5. Great for people who do not wish to research individual stocks
Disadvantages
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7. 1. Expense ratios are high
2. Year end capital gains distributions are a real problem with mutual funds
3. Open ended funds can only be purchased and sold after market close
4. 70% of mutual funds underperform their benchmarks
5. The really good funds are closed to new investors
There is a sub class of mutual funds called index funds that have many of the advantages and
fewer of the disadvantages.
The disadvantages that they do not have
1. Much lower expense ratios
2. Most can be traded at any time the market is open. They are traded like stocks
3. Virtually no year end capital gains distributions so very favorable tax treatment for most
4. Do not by definition under perform their benchmarks except when subtracting the expense
ratio which tends to run at less than 0.5% versus 1.5% for the average mutual fund.
One of the really bid disadvantages of index funds is that some are capitalization weighted
which means that they are not diversified investments.
David asks…
What mutual funds are considered a good investment?
I keep hearing that one should invest in mutual funds that are a combination of around 60%
stocks and 40% mutual funds. Can someone knowledgeable in mutual funds recommend a
company (like Vangard for Fidelity) that sells mutual fund that invests with this arrangement
(60/40)?
Thanks guys....this is great advice....all of it. I will heed your guidance. Wonder when the bottom
is going to drop out of the stock market again?
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8. Steve Winston answers:
There are many in that category. They are referred to as balanced funds. Morningstar will
provide you with a 5 star rating of the best of the lot. Here is a link to all of the 5 star balanced
funds. The Fidelity fund is rate as 5 stars. But check them all out.
Http://screen.yahoo.com/a?cc=2%3B&nm=&proy=&mgrt=&rtmin=5&rtmax=&retrmin=&retrmax=
&risrmin=&risrmax=&trytd=&troy=&trty=&trfy=&mii=&mfl=&er=&namin=&namax=&tomin=&toma
x=&mmcmin=&mmcmax=&vw=1&db=funds
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