Mutual Fund Investing
Money accumulated in a mutual fund, is invested in equities, fixed-income, options, and/or money market. Equities include foreign and/or domestic public traded companies. Fixed-income includes Corporate bonds, Federal treasuries, and State / Federal bonds. Money Market is an interest earning account. Options allow mutual funds to sell or buy “Puts” or ‘Calls”, against a stock or commodity, preferable for a future gain. Option trading is highly volatile, but the financial rewards can be significantly high. Purchasing ‘Put’ Options allow the fund, to edge against a stock or commodity (oil, currency or metal) that may decline in value, over a period of days, weeks or months traded. If the underlying stock or commodity depreciates in value, the ‘Put’ option will go up in value. Opposite application, applies when buying a ‘Call’ option. However, funds preferable do not hold onto options a long time, since each option, has a time value. Once an option expires, will become worthless.
Mutual funds diversify their investing or specialize in one area, such as utilities, manufacturing, metals, telecommunication, airlines, small growth companies, high yield bonds, and other sectors. Some mutual funds specialize in tax-free investing, high high-yield bonds, and foreign stock markets. Also, hedge funds are very speculative investment funds: Including arbitrage, emerging markets, mergers/takeovers, health – bio-technology investing This type of fund, will utilize more options and future trading, which is more suitable for high – risk investors.
There are two types of mutual funds: Closed-end or Open-end fund, each is based upon the Net Asset Value. Net Asset Value is the total average value per share, of the mutual fund, based upon the number of shares sold, then divided into the net value of the mutual. Value of mutual fund, adjust each business day, along with the Net Asset Value. If a mutual fund is closed-end, the fund is traded during a business day, on a stock exchange (New York, American, Pacific, or National Association of Securities Dealers Automated Quotation), and value of the fund can traded below or above the Net Asset Value. When a fund trades, below it’s Net Asset Value, referred to discount, and above referred to a premium. A fund trades above Net Asset Value, essential means, if fund was to be liquidated, the shareholders would only receive the value per share, of the Net Asset Value. Opposite would happen, if the mutual fund trading, below Net Asset Value. However, extremely rare that a fund would liquidate or sell off the assets, and then distribute the proceeds to the shareholders. When a mutual fund is Open-end, the value of the fund is determined at the end of the business day. When purchasing or selling shares of a Closed-end Fund, a commission is only paid, plus any miscellaneous fees, associated to the transaction. Open End funds are purchased or sold through organizations, which sell a variety of funds or family of funds, which invest in different areas. Many of these funds, will charge fees when purchasing / selling and possible other additional charges, while owning shares (loads). Careful reading of the prospectus, will outline costs. Mutual funds are sold through licensed brokerage firms, financial planners, registered representatives, and online. Each of these representatives have their own interest for supporting various institutions, where they work, and will likely be bias, providing advise.
Regardless of the type of fund, dividends are distributed, when available, to the shareholders, either monthly or quarterly, based on the decision of the board of directors. Capital gains maybe distributed to the shareholders, unless significant capital loses had occurred, which would offset by capital gains earned. Management’s of mutual funds, evaluate the purchasing and selling of assets, distribution of any dividends and capital gains, throughout the year. Most capital gains are distributed to shareholders, before the end of the year. When a mutual fund declares that a dividend or capital gain distribution will be delivered, to shareholders, that is the “Ex dividend” day (date of record). Means that shareholder of record, by the end of that business day, will be entitled to receive that amount. Any shares purchased, after the date of record, are not entitled to those dividends and / or capital gains. Date of Payment, the mutual fund mails out the amount or through electronic processing, shareholders receive the amount (generally a week or more after date of record). Most of the time, after the day of record, value of the mutual fund will depreciate, by the amount distributed to shareholders. Shareholders that receive dividends, and capital gains are responsible for paying taxes, on that income. However, some dividends may not be taxable, depending if the mutual fund invested in tax exempt treasures and/or bonds, and State the Shareholder resides
Mutual funds will offer their shareholders, the option to reinvest their dividends and/or capital gains into the fund, exchanging for more shares. This provides benefits to the shareholders: No additional commission or fees to be charged for reinvesting, additional shares will compound annual, more dividends and capital gains (assuming the fund grows each year), and more shares acquired during times, when fund has depreciated in value (Cost averaging investing: Receiving or purchasing shares at high and low prices over time).
Mutual funds provide free information, on their track record (Prospectus: Quarterly or annual reports). However, keeping in mind, one or more years of top performance, may not allows reflect future outcomes. Opposite it true, when a fund is performing poorly, more than one year. Economies, interest rates, value of currencies, political environment, inflation, and disinflation, almost inevitable changes each year, may have a positive or negative impact on a mutual fund. Many mutual funds will specialize or invest money in a sector, which may performs better in certain years, than other times. Finally, investments decisions of managers and board of directors of mutual funds, determine how well their fund performs. When shareholders meet, they can vote for the re-election of board of directors or choose to elect new members, if their performance to shareholders is unsatisfactory.
What kinds of mutual fund to invest, and how to evaluate their performance, is available through many websites including: Morningstar.com, Cititrade.com, Quicken.com, and Bloomberg.com. Also, information available:Yahoo Finance, and reading published periodicals including Wall Street Journal, Barrons, and Investor’s Business Daily. These listed resources, will provide Net Asset Values for any type of fund. Popular family names of Open End Funds include: Fidelity, John Hancock, Legg Mason, Scudder, T. Rowe Price, Value Line, and Nuveen Funds. Well, known Closed End fund includes: Salmon Brothers, Baker Fentress, Tri-Continental, and Petroleum Resource (None of the Open or Closed End Funds are recommending or not recommending for consideration).
Rarely does an Open – End Fund, convert to a Closed End fund. When this happens, unlocks the underlying value, often hidden in a Closed End Fund, since the fund would likely be trading at a discount to it’s underlying, Net Asset Value. After converting to an Open End Fund, then starts trading at the Net Asset Value.
