Advice On Mutual Funds
posted on 05/13/2009
It is always a good idea to read all the Investing lessons in order to get the maximum benefit.
Lesson 1: Basics of Investing - http://www.advice.com/latest/article/2009/05/11/Advice+on+Understanding+the+Basics+of+Investing
Lesson 2: Beginning to Invest - http://www.advice.com/latest/article/2009/05/12/Advice+on+Beginning+to+Invest
If you have come this far, I take it for granted that you are now aware of the basics and raring to go further. At this point, you must realize that you as a person are unique and there may be 1001 reasons why one investment vehicle won't give you a pleasant ride, while the same may be the best for someone else. But there are a few well tested ones that I will review from now on. Still the decision is yours.
A Mutual Fund, as the name suggests, is a trust where many people put in money and this pool of money is managed by a professional, who on behalf of the people invests the money and the profits/losses are shared (Of course we need to pay the professional his fees too). Since there are many types of investment, there are even more types of Mutual Funds. There are many private players each with a long list of funds and to sort these hundreds of funds and find the right one for you will take quite some time. Each fund has units that you can buy at a NAV (Net asset value). Say if the NAV is 100$ and you invest 2000$ in that fund, you will be alloted 20 units of that fund.
Let us see the major types alone. One way of classifying funds is based on where they invest.
1. Equity - Invest in Shares of Companies in the Stock Market
* Equity Growth - Invest in companies that are believed to provide high capital gains
* Equite Value - Invest in companies that are believed to be undervalued currently
* Equity Index - Invest in companies that are part of an index like S&P 500
2. Bond Funds - Invest in Bonds of Companies and Govt. Lower risk and lower return
3. Funds of Funds - Mutual funds that invest in other mutual funds
As you must have understood, Equity funds with growth give the highest risk and highest return. Some funds might even give in the range of 40-60% in a specific time period. Bond funds are less riskier and lesser returns.
Yet another way to classify funds would be on the basis of when one can invest in them.
1. Open-ended funds - Open throughout the year. One can invest anytime.
2. Closes-ended funds - Open only at specific intervals for investment and then traded over exange
So if you happen to see details of a fund you can find that it could be "Equity Value oriented and Open Ended" Scheme or any other combination. There may be many gimmicks in the actual name, but you must take care to see the complete details.
Risk and Returns are the two things that you got to note down. For that you can see how the fund had performed in one year, three years, five years and since it was started. You must compare it with similar funds and with NASDAQ or S&P 500. Also don't get carried away by the fact that the fund has a great 3 year avg of 50%. It could be due to one 100% and two negative 25%. That is not a good sign especially if the negative 25 % is from the recent year. So check each year's performance also separately.
Major Advantages of Mutual Fund
* You get a professional to manage your fund
* You can invest in Stock Market with just a few hundred rupees/month
* You get instant diversification across shares of many companies
Major Disadvantages of Mutual Fund
* Returns are market linked. So there is a possibility of losing your capital (negative returns)
* All depends on that one professional. He may not be efficient enough.
* Cost overhead
* Sometimes too much diversification can dilute your profits
Expenses
There are many expenses though associated with mutual funds like management fees, agent transfer fees, brokerage and so on. One has to carefully understand the expenses before taking the plunge.
The Next in the series would be investing in Gold.
Comment on this article
You must be logged in to post comments.
Previous Comments