What to Look for when Choosing Mutual Funds
Each of the above cases has ample choices to make and it is possible to put a tailor-made investment vehicle at their disposal. In fact, stock markets yield a much better return than mutual funds except that the risk involved is much higher when investing in stock markets. However, when we come to think of it, the mutual fund managers themselves are investing the money, for the most part, into the stock market, but what makes them different is their knowledge and experience that ordinary folks might not be in a position to muster. At the same time most people do not have the time to do the required follow-ups and they might end up seeking advice about which stocks to choose. As a result, the end result could go either way, making taking that route risk-prone as well as more expensive.
Consequently, people prefer in most cases to choose mutual funds, and their choice has to reflect their exact needs since there are a number of mutual funds available that could be tailor-made to their needs. For example, those who have a lump sum to invest might want to augment their current income. And they have to know what kind of income they want while at the same time they have to keep in mind the performance of their capital, their principal investment.
There are funds known as “growth and income funds” and what they do is they combine long-term capital growth while furnishing a modest current income. On the other hand if what the investors are looking for is a high current income without eroding their capital, but without being too concerned about its growth, there are funds known as “fixed-income funds” that will avail them with the desired higher current income, and while doing so the risk involved is not very high, but still it is there. Or those who want to have it both ways, where they want to have high current income with some capital growth should look at what the fund managers call “balanced equity income fund” because this fund could acomplish both.
What key here is what the fund managers do in order to satisfy these needs because they have to speculate using their fair judgements so that the loss will be less as much as possible if it is there. There are times they have to be aggressive and there are times they have to be conservative in their judgements, and at the end of the day the investors will be in to cash on these judgements. The marketplace provides these fund managers different kinds of instruments they can use wisely, and since it is a job, they have to know what they are doing. If they were not showing reasonably good results no one would want to use them, because news travel fast, and people would choose to keep their money in banks and earn the meager interest rate they are providing. Money in a bank up to a certain amount is covered by the government, whereas money invested with mutual fund companies is not covered and it speculative money that the investor could lose.
Hence, what is key here is, those who want to invest will have to know what they exactly want and it is just a matter of laying it out to the fund managers. The rest is their job and that is why they command a top pay as the fund starts performing. People do not necessarily have to have a lump sum to become investors. Those who are income earners can start putting away money from their earning and they can start with any amount. In fact, one of the best-known methods of investing focuses on this group and a fund called “dollar-cost” averaging is for those who want to start with whatever capital they have and want to see the fund grow. There is no limit as to how much money to put into such an account except that it is possible to make the investment grow steadily by simply putting money in it on an ongoing basis.
The advantage of mutual funds is investors could take a given amount of risk in order to get a better return than for example keeping the money in a bank, or investing it into other vehicles like government bonds, which are much safer, but whose return is fixed, and their price fluctuates according to interest rates. If investors want to redeem the bonds, they will have to wait until the price of the bond is favorable. At the same time the flexibility to make profits is much lower when compared with mutual funds where an investment could be liquidated at the market price of the asset anytime or even investors are allowed to write checks on their investment. At the same time since the major sector the funds are invested in is the stock market, where except the volatility, the return is known to be much favorable than most investment vehicles, threre is a much better diversification.
Just to be familiar with the kind of funds that are around, the “fixed income funds” are those that are suitable for those who want a higher current income and who can tolerate risk on their main capital. These kinds of funds usually choose to invest in bonds that could be corporate or governmental and their return is fixed. Yet, because the price of bonds fluctuates according to the rise and fall of interest rates, it could affect the capital adversely, but as long as it is a long term investment it is possible to come out of the deal when the time is right by realizing profit.
But for the most part since it is a conservative investment vehicle, even when the funds invest in the stock market they go for the preferred shares, because at the time of liquidation they will be first in line to recover their investments. The funds that invest in high yielding equity securities are “equity income funds” and their yield is volatile, which will be translated into making the capital vulnerable to erosion, but the yield could go up and down depending on what the companies are paying. Those funds that invest in bonds also could invest in special funds that are tax-exempt and are good for certain regions to take advantage of, especially for those that are in high tax bracket.
Money market funds are among the safe investment vehicles because the fund managers invest them in safe financial instruments like Treasury Bills, short-term debt securities offered by governmental bodies, banks, and corporation. These instruments do not only provide high security for the capital but they provide modest income as well as are easy to liquidate. Like in all the other instruments those that give good return are best served if the return is reinvested, but for those who want to augment their income, as long as the main capital is not eroded some of these instruments meet such needs much better than others.
Those who want to invest in a given sector but they cannot do it for various reasons can use a fund known as “specialty sector fund” and the capital will directly be invested in the securities of those sectors. This fund is for those who know exactly what they are doing and the risk is always much higher than the rest of the funds mostly because of the lack of the diversification that will be created. There are funds known as “international and global funds” and that is what they exactly are; investment in companies that are outside of the USA, and for the most part they are known for their risk and aggressiveness. They might be good for quick or even for a long-term gain, yet it is beware investors, as the outcome could go either way, and for the most part they might not be different from what we are having here, but they avail more diversification.
All in all, whether it is for a long term investment where once invested the money will not be touched for a long time, or to see the investment grow gradually, or even to speculate while at the same time putting the high risk and volatility of the stock market under control, or to augment a current income; it does not matter what the purpose is mutual funds seem to have all the answers, and the fact that they are run by dedicated professionals that are known to put their reputation on the line even makes them almost a safe haven for investment.
