financial mutual funds for novices
WRITTEN BY Rose M. Anderson, CFP®
WE ALL LIKE CHOICES, but when faced with
United States, and global funds, which are
more than 8,000i mutual funds, taking a dart to
worldwide. Select the fund with the objective that
the newspaper’s financial section can begin to
helps to diversify your portfolio.
seem like a logical selection technique. But wait; there is a better way. Let’s peel back
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hiring managers to do this for you. For myself, I
the layers of mystery and start at the core of
want the most experienced managers I can find,
importance: the objective of the fund. Every fund
preferably with a long track record on the fund in
must state the type of stocks or bonds in which it
which I am interested. And I don’t want to pay
is investing and their concentration. For example,
too much for them.
a U.S. Large Company fund will be searching for
You do not manage the fund yourself; you are
Every fund has expenses. Every one. Even the
those big companies based in the United States
index funds. If you don’t know what these
with capitalizations over $60 billion. A balanced
expenses are, you could be paying too much for
fund will invest in a blend of perhaps 60 percent
your fund. These expenses are deducted from the
stocks and 40 percent bonds. There are
investment results, which means that in years of
international funds, which invest outside the
low returns, the fund company is reaching into
But you should expect to pay for this advice.
investment results in my account and the best
Briefly, there are three ways to pay: fee-for-
way I know to do that is to keep the expenses
service, which is typically by the hour; a
very low. I’m not a fanatic about it. If there is a
commission; or an asset-based fee.
management team that I would like to have
the fee-for-service basis, but you must have
more, then all right, so long as the emphasis is
follow-through. In my experience, some people
get to a certain point and then get busy and
Everybody likes to buy a fund based on its
My preference is to pay the hourly rate on
manage money for me and they cost a little bit
return history. But you can’t simply because it is
never accomplish their goals. So for many people, this option won’t work well.
history. This history serves as a gauge to
peel back the layers of mystery and start at the core of
My second preference is to pay the
measure the manager against the fund’s
commission. It’s very straightforward and a one-
benchmark, assuming the manager hasn’t
time payment on your investment. You know how
changed. If you have a new manager, you really
much it is before you agree to the investment. If
have no track record for that fund with that
you don’t understand it, keep asking questions
until you do understand what you’re spending.
So, where can you find all these informative
My least favorite method of paying for advice
pieces of data for the mutual funds? The
is the asset-based fee. Over time, this will be the
prospectus is the one source that holds it all.
most expensive way for you to invest.
Most mutual funds now have the prospectuses
importance: the objective of the fund.
One last caveat: you should take a look at
available online. Yes, it is worth the time to read
your investments once a year. Do the objectives
through it. You will find a 10-year return history
still feel comfortable to you? What has changed
of the fund. You will be able to read the
in your life? If you are working with a
objective and decide if you are comfortable with
professional, you should schedule a review at
what it describes. The expenses will be spelled
least once a year and whenever a major life
out in detail. This expense area will also detail
event takes place. This doesn’t mean to start
whether there is a front-end sales charge or a
over with new funds, but maybe rebalance or
back-end charge. A sales charge is not a bad
add to an IRA. Investing is fun and mutual
thing, but you should know about these charges
funds are the most efficient way to invest. I hope
in advance so you can make the decision to buy
you enjoy it!
the fund knowing all of the variables.
Tip: Check out the investment glossary of the
A sales charge is nothing more than the fee to the advisor for the direction and advice given
) ) ) mutual funds
your pocket to pay their fees. I like to keep my
American Association of Individual Investors (AAII) at www.aaii.com/glossary. ) ) )
to you. There are ways to reduce this sales Rose M. Anderson, CFP®, is the owner of
charge and it’s all spelled out in the prospectus. There is still a big debate over paying the sales charges: load vs. no-load. It’s up to the individual to decide if you have the time and the tools to dig into the nuances of a mutual fund and decide if it’s right for your investment portfolio. It takes time and patience. An alternative is to seek professional guidance.
Anderson Financial, Inc. and Pure Gallery, Inc. www.PureGallery.net. Rose@puregallery.net. i
Per Chicago’s Morningstar, Inc. as of February 2008.
The information contained in this article is for information purposes and is not to be considered as financial, tax, or legal advice. As with any financial or legal matter, consult your qualified securities, tax, or legal advisor before taking action.
) ) ) mutual funds
Know Your Investment Jargon Mutual Fund – A fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, futures, currencies, or money market securities. These funds offer investors the advantages of diversification and professional management. Funds levy fees for this management as well as 12b-1 fees, exchange fees, and other administrative charges. All shareholders share equally in the gains and losses generated by the fund. Load Fund – A fund sold through a broker. No-Load Fund – A fund sold directly to investors. Alpha – In the case of a mutual fund, the alpha measures the relationship between the fund’s performance and its beta over a three-year period. Beta – The coefficient measuring the fund’s relative volatility. The beta is
Number of shares outstanding multiplied by stock price.
growth or profits but where the fund managers expect this to change. By buying at the current lower prices, the managers expect bigger fund gains
when the market recognizes the
Large Cap – Typically contains
opportunities in these companies.
companies with at least $5 billion in
Keep in mind that these opportunities
outstanding market value.
may never be recognized and the
Small Cap – Typically contains
prices of some individual holdings
companies with $500 million or less
to the rest of the stock market. The
Mid-Cap – Contains companies with a
S&P 500 Stock Index has a beta
market value in between small and
International Funds – Concentrates in
coefficient of 1. A fund with a higher
companies outside the United States.
beta is more volatile than the market,
Micro-Cap – Those companies under
Global Funds – The fund managers
and any fund with a lower beta can be
$50 million in market value.
can find opportunities for investment
Growth – Funds that emphasize
anywhere in the world.
companies that have exhibited faster-
Index Fund – That which follows a
than-average gains in earnings over
benchmark or index. The investment
measure of the degree to which an
the last few years and are expected to
results will most likely trail the
individual value in a probability
continue these high levels of profit
benchmark by the amount of the
distribution tends to vary from the
Standard Deviation – The statistical
Market Value or Market Capitalization –
U.S. Funds – Concentrates on
than the market.
companies that have not shown
companies based in the United States.
expected to rise and fall more slowly
Value – Funds that emphasize
dispersion, the greater the risk.
in market value.
the covariance of the fund in relation
mean. The greater the degree of
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