for Retirement - How to Buy Mutual Funds including Equity, Index, Money
Market and Bond Funds - Load Versus No-Load Funds
Continued from First Page: There are administrative costs, management
costs, and the 12B-1 Fee. The 12B-1 Fee is an expense that goes toward
paying brokerage commissions and toward advertising and promoting the
fund. The expanses play into the expense ratio or management expense
ratio (MER). Expenses should not exceed 2% and ideally will be much
lower. According to the SEC, "Higher expense funds do not, on average,
perform better than lower expense funds."
Mutual funds are
divided into load and no-load funds. The difference between Load and no
Load funds is the cost of the salesman. There are funds that do not
charge a sales commission (or load). Sometime the salesman will tell
you that the load is the fee that pays for the “service” of a broker
choosing the correct fund for you. So far there is little evidence that
shows that this service correlates into a better fund selection.
There are front-end loads and back-end loads. The front-end load occurs
when you make purchase. The Back-end loads are sometimes referred to as
deferred sales charges. This load may decrease with time. For
instance, if you sell the fund within a year you may end up paying a 6%
fee, but if you hold on to the fund for a specified period of time there
may not be a fee.
There are three basic types of mutual funds: Equity funds, Fixed income
funds and Money market funds. There may be variations of these funds,
but for the most part equity funds means stock funds, fixed income funds
are invested in bonds. The equity (stock) funds are typically invested
in fast-growing companies and are known as growth funds. Some of these
funds may specialize in a specific sector or region and are called
Money Market funds are typically the safest investments. They usually
invest in T-bills and short term debt instruments. You won’t get huge
returns, but you won’t have to worry about losing your principal. These
funds usually return twice what you would receive in a savings account,
but may be less than a typical certificate of deposit (CD).
Bond funds are a little more risky, but they may return more. Their
purpose is to provide current income on a steady basis. They are
sometimes referred to as income funds, because they provide a steady
cash flow to investors. They are great for the conservative investor
Some Bond Funds may be tied to interest rates. If interest rates go up
the value of the fund may go down. Also, some of these funds may invest
in junk bonds, which are riskier than government securities investments.
Balanced Funds provide a mixture of safety, income and capital
appreciation. These funds will invest in a combination of fixed income
and stock investments. Typically they will have a 60% equity stake and
40% fixed-income stake. This weighting might also be restricted to a
specified maximum or minimum for each asset class.
Asset Allocation funds are similar to Balanced Funds. These funds do
will not have the weighting restrictions of Balanced Funds. In these
funds the portfolio manager will have more freedom to switch the ratio
of equity and fixed-income investments depending on the business cycle.
Equity Funds are typically the riskiest, and are the largest category.
Their investment strategy may include is long-term capital growth with
some income. Some funds will specialize in value stocks while other
managers may look for growth stocks. Morning star developed a chart
concerning the variables.
company that might be undervalued (or a bargain). Maybe the
company fell out of favor with the market but is still well run.
These companies are characterized
by low P/E ratios, price-to-book ratios, and / or high dividend yields,
Another investment strategy (or style) is to look for stocks that are
expected to experience strong growth in earnings, sales, and cash flow.
The blend is a company that fits incorporates a little of both.
The size refers to the size of the company invested in (small cap /
large cap). A mutual fund that invests in large companies that are
in strong financial shape with expected stock prices would fall into the
top right quadrant (or box).
Index Funds is intended to replicate the performance of a broad market
index like the S&P 500 or Dow Jones Industrials (DJI). These investors
figure that most funds can not beat the market return. These funds
usually offer low fees.
There are other funds that specialize in global markets or certain
segments of the economy. Global funds invest outside the US, and are
faced with risks involving foreign politics and economies. They can
target regional markets. Some of these funds are well diversified, and
may even outperform US investments.
Specialty Funds will target various sectors like technology, financial,
and health. These funds can be extremely risky, but can also reap big
By Dan Wilson
Books on Investing
Keywords and misspelling: mutuel investmint investing intesters
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