 |
|
|
|
Mutual Funds
In other words, in the case of a mutual fund, the fund manager trades the fund's underlying securities, thereby realizing capital gains or loss, and collects the interest income or the dividend, following which the investment proceeds are passed along to the individual investors. The value of a share of the mutual fund is known as the net asset value or NAV and is calculated daily based on the total value of the fund divided by the number of shares purchased by investors. Mutual fund companies are legally known as 'open-end companies' and a mutual fund is usually one of three basic types of investment based financial companies available in the United States of America. However, outside of the U.S.A., the term mutual fund is a rather generic one used for various types of collective investment. In the United Kingdom and Western Europe including offshore jurisdictions, for instance, other forms of collective investment are also seen to coexist with the mutual funds. These include unit trusts, Open-Ended Investment Companies or OEICs, Soci騁・d'investissement ・capital variable or SICAVs as well as unitized insurance funds. Mutual funds can be used to invest in many different types of securities. The most common among these are the following: o Cash There however, are several hundreds of sub-categories to each of these. Stock funds, for example, can invest primarily in the shares of a particular type of industry, such as technology or else utilities, and these are known as sector funds. Bond funds can vary according to the level of risk involved - including high yield or junk bonds, investment-grade corporate bonds, etc.; type of issuers involved - including government agencies, corporations or municipalities; or maturity of the bonds, both short as well as long term. These two bond types are similar in the sense that both stock and bond funds can invest primarily in U.S. securities or domestic funds; both U.S. and foreign securities or global funds; or else in primarily foreign securities or international funds. Majority of the mutual funds' investment portfolios are constantly adjusted and fine tuned to match current market scenarios under the supervision of a professional manager. It is this manager who forecasts the future performance of investments appropriate for the fund and chooses the ones which he or she believes will best match the fund's stated investment objective. A mutual fund is usually administered through a parent management company, which may hire or fire fund managers based on performance. Most mutual funds are generally subject to a special set of regulatory, accounting as well as tax rules. Unlike most other types of taxable business entities, mutual funds are not taxed on their income as long as they distribute substantially all of it to their shareholders. So also, the type of income they earn is often considered to be unchanged since it passes through on an as-is-where-is basis to the shareholders. The distribution of tax-free municipal bond income is also tax-free to the mutual fund shareholder. Taxable distributions can be categorized into either ordinary income or capital gains, depending on how the mutual fund earned it. Choosing a mutual fund from among the thousands offered is far from easy. The following is only a rough guide and do include some common pitfalls that you need to be aware of. 1. Always make it a point to check with your tax advisor before investing in a tax-exempt or a tax-managed fund. 2. Do remember to match the term of the investment to the time that you expect to keep it invested. Any money you may require right away, for an emergency, should be put in to a money market account, while money you will not need until you retire in decades probably, or else if you are saving up for a newborn's college education, for instance, should be in longer-term investments, like stock or bond funds. Investing any money you will need soon in stocks increases the risk of you having to sell them when the market is low and thereby missing out on the rebound. 3. Expenses do matter over the long term, and of course, the cheaper it is, is almost always better. The expense ratio can be found in the prospectus; these are critical in index funds, which seek to match the stock market. On the other hand, actively managed funds need to pay the manager, so they usually have a higher expense ratio. 4. Sector funds often top the list of the 'best fund' lists that you will come across every year. However, the problem with these is that these are usually a different sector each year. So also, some sectors are seen to be vulnerable to industry-wide events and hence it is best to avoid making these a large part of your investment portfolio. 5. Closed-end funds tend to sell at a discount to the value of their holdings; however, you can at times get extra returns by buying these in the market - hedge fund managers have mastered this trick. This would also imply that buying them at the original issue is typically a bad idea, since the price is likely to often drop immediately. 6. Mutual funds usually make taxable distributions towards the end of the year. Hence, before planning to invest money in the fund in a taxable account, it is a good idea to check the fund company's website to see when they intend to pay the dividend; it would be best to prefer to wait until afterwards if it is likely to be coming up soon.
8. Diversification is a sure-shot way that can reduce the risk involved in investments of this sort. Ideally investors should own some stocks, some bonds, and some cash, of which at least some of the stocks should be foreign. You may not get as much diversification as you would have imagined if all your funds are with the same management company, since there is would often rely on a common source of research and recommendations. On the other hand, too many funds will give you about the same effect as that of an index fund, except for the fact that your expenses would be a lot higher than otherwise. Buying individual stocks would expose you to company-specific risks, and in case you do buy a large number of stocks the commissions may cost a lot more than a fund would. 9. The compounding effect is the best aspect about these funds, since a little money invested for a long time would grow into a lot of money later on. |
||||||||||||||
 |
Mutual Funds |
|
||||||||||||||
|
||||||||||||||||
|
||||||||||||||||
|
||||||||||||||||
|