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Investment Strategies for Retirement - How to Buy Mutual Funds including Equity, Index, Money Market and Bond Funds - Load Versus No-Load Funds

March 14th 2006

Investment Strategies for Retirement - How to Buy Mutual Funds including Equity, Index, Money Market and Bond Funds - Load Versus No-Load Funds

Wall Street

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 specialty funds.


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 and retirees. 

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. 

Morningstar chart

A 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 gains. 

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By Dan Wilson
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