mutual fund basics http://www.wisebread.com/taxonomy/term/17857/all en-US The 3-Step Plan to Choosing Your First (or Next) Mutual Fund http://www.wisebread.com/the-3-step-plan-to-choosing-your-first-or-next-mutual-fund <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-3-step-plan-to-choosing-your-first-or-next-mutual-fund" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/thinking-4978716-small.jpg" alt="thinking" title="thinking" class="imagecache imagecache-250w" width="250" height="214" /></a> </div> </div> </div> <p>I still remember buying my first mutual fund when fund families sold their offerings by telephone and mail.</p> <p>Research typically involved poring over the pages of reference books in the public library. So, rather than spend my time in this laborious effort, I called a fund company and started talking to one of its investment advisors. He couldn't give specific advice but helped me make a choice among his company's offerings based on my goals, risk tolerance, and preferences.</p> <p>Today, you can still ask for such advice in choosing a mutual fund, either by talking to a real person or perusing pre-selected recommendations available through <a href="http://www.wisebread.com/a-guide-to-online-brokers-for-investing-newbies-and-beyond">online brokerage firms</a>.</p> <p>However, a better process is to identify mutual funds that satisfy your criteria, make comparisons among matches, and choose one that best fits your goals and preferences. (See also: <a href="http://www.wisebread.com/mutual-funds-for-wise-bloggers">Mutual Funds for Wise Bloggers</a>)</p> <p>Even though this second approach consumes more time and you may end up selecting a fund already on your broker's list, you'll have a better idea of why the fund is right for you. This knowledge can help guide future decisions about adding shares to your portfolio, selling shares when the fund no longer meets your needs, or buying complementary funds to create a balanced portfolio.</p> <h2>Step 1: Think About Your Investment Goals</h2> <p>Start by considering your financial goals and time horizons. Generally, you'll want to save for retirement, which is likely to be 30 years or more from now. You might also decide to build wealth to start a business, <a href="http://www.wisebread.com/living-in-an-rv-full-time-what-you-need-to-know">buy an RV to travel the country</a>, or earn a graduate degree in mid-life, which may be 15 or 20 years away.</p> <p>To reach these goals, figure out how much you need to set aside monthly or annually. Use a personal finance calculator on setting goals (try these from <a href="http://www.schwab.com/public/schwab/resource_center/how_to_invest/investing_basics/set_your_goals">Charles Schwab</a> or <a href="https://ww4.janus.com/Janus/Retail/BasicGoalPlanner?SourceServlet=StaticPage?jsp=jsp/PlanningEducation/InvestmentTools.jsp">Janus</a>) or create a spreadsheet formula using financial functions such as <a href="http://www.wisebread.com/how-to-calculate-future-value-and-why-it-matters">future value</a>.</p> <p>Next, determine the asset allocation or investment mix recommended to reach your goals. You may also need to consider your risk tolerance, whether conservative, moderate, or aggressive. Again, using investing resources (such as <a href="http://www.schwab.com/public/schwab/resource_center/how_to_invest/investing_basics/plan_your_mix">planning your mix</a> from Charles Schwab or <a href="https://ww4.janus.com/Janus/Retail/StaticPage?jsp=jsp/AssetAllocator/AllocLanding_Moderate.jsp">Asset Allocator</a> from Janus), you can determine the category of assets in which to invest.</p> <h2>Step 2: Use Screening Tools to Identify Matching Funds</h2> <p>There are a variety of screening tools offered by personal finance sites and online brokerage firms, such as these:</p> <ul> <li><a href="http://screener.finance.yahoo.com/funds.html">Yahoo's mutual fund screener</a></li> <li><a href="http://online.wsj.com/public/quotes/mutualfund_screener.html">Wall Street Journal's mutual fund screener</a></li> <li><a href="http://screen.morningstar.com/FundSelectorAOL.html">Morningstar's fund selector</a></li> <li><a href="https://research.sharebuilder.com/sharebuilder/mutual-funds/find-mutual-funds">ShareBuilder.com's mutual funds finder </a>&nbsp;</li> <li><a href="https://personal.vanguard.com/us/funds/vanguard/all?reset=true&amp;sort=name&amp;sortorder=asc">Vanguard's fund search tool</a></li> <li><a href="http://www.schwab.com/public/schwab/investing/investment_help/investment_research/mutual_fund_research/mutual_funds.html?&amp;&amp;path=%2FProspect%2FResearch%2Fmutualfunds%2Foverview%2Fscreener.asp%3Fsymbol%3D">Charles Schwab's mutual fund screener</a></li> <li><a href="http://apps.finra.org/fundanalyzer/1/FA.aspx">FINRA's fund analyzer</a></li> </ul> <p>All are designed differently, giving you the opportunity to screen based on various criteria. Some give results from a prescreened list (those available from the firm's own family of funds, for example), whereas others help you find offerings from among the universe of mutual funds.</p> <p>There are several criteria to consider in selecting your fund, including category, fees, past performance, turnover, and others.</p> <p><strong>Category</strong></p> <p>Choose among Large-Cap Growth, Large-Cap Value, or Large-Cap Blend, Target Date, or Market Allocation funds.</p> <p>Typically, large-cap equity dominates most asset allocations as these represent the largest, most established, and often most consistent companies in the U.S. or global economy. So, you might choose a large-cap offering as your first mutual fund. Alternatively, you could buy a fund that offers a balanced portfolio suitable for your timeframe; these may be called lifecycle, target date, or allocation mutual funds.</p> <p><strong>Fees</strong></p> <p>Select no-load funds with no transaction fees and annual operating expense ratios that are at least below the category average or ideally less than 0.5% or 1.0%.</p> <p>By selecting mutual funds with low costs, you can protect your investment returns from being eroded by fees. Theoretically, funds with substantially higher market returns could easily cover costs of 1-2% or more. In practice, however, higher management costs do not consistently yield better returns. In the future, you may want to purchase potentially high-return funds despite higher-than-average costs, but for your first mutual fund, stick with lower-cost options.</p> <p><strong>Past Performance</strong></p> <p>Find funds with 5-year returns, 10-year returns, or returns since inception that meet or exceed the S&amp;P 500 or category average.</p> <p>Looking at past performance is a double-edged sword. You don't want to select a fund that has consistently been a poor performer over the long term. However, funds with more recent strong performance may be more apt to lose value in the short term. For example, in the late 1990s, <a href="http://www.investopedia.com/terms/t/tech_bubble.asp">mutual funds with heavy concentrations in the technology sector experienced strong gains followed by significant losses</a>. In short, don't &quot;chase performance&quot; or buy high-priced funds at their peak, but don't buy consistently low-performing funds either.</p> <p><strong>Turnover</strong></p> <p>Choose the category average or a lower percentage (50-75% or less) if you are looking for a more stable fund.</p> <p>Turnover represents the frequency in changes of the mutual fund's holdings. Fund managers will buy and sell stock based on investment strategies. But this turnover in underlying stock can trigger capital gains, fund distributions, and tax liabilities that erode returns if you are holding the fund in a taxable account. Note that funds with turnover of 25% or less tend to be index, allocation, or target date funds with little activity.</p> <p><strong>Other Factors</strong></p> <p>You can apply many more screens relating to factors such as risk, fund manager tenure, and minimum investment. Some screens have overlapping purposes; for example, you could look at the tax efficiency of a mutual fund rather than its turnover to gauge the impact of the investment strategy on taxes.</p> <h2>Step 3: Choose a Mutual Fund From Your Filtered Matches</h2> <p>After you've narrowed your selections to a manageable assortment, choose a few to compare. Determine which funds excel in certain areas; for example, both may have expense ratios that are less than 1%, but one may have dramatically lower expenses in comparison to the other.</p> <p>Record the names and/or tickers of the mutual funds you want to investigate. Research your selections by reviewing the prospectus, checking out its major holdings, and reading analyst reports. When you are ready, buy shares in the fund that best fits your needs and wants.</p> <p><em>Are you ready to invest in mutual funds? How will you choose the best one for you?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/the-3-step-plan-to-choosing-your-first-or-next-mutual-fund">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/begin-your-investing-career-right-with-some-mutual-fund-basics">Begin Your Investing Career Right With Some Mutual Fund Basics</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-investments-that-may-soar-during-trumps-term">8 Investments That May Soar During Trump&#039;s Term</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-stocks-to-buy-if-you-love-the-earth">5 Stocks to Buy If You Love the Earth</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-your-money-can-support-your-values">4 Ways Your Money Can Support Your Values</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-are-people-retiring-in-their-30s">How Are People Retiring in Their 30s?!</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment mutual fund basics Tue, 02 Jul 2013 10:20:44 +0000 Julie Rains 980277 at http://www.wisebread.com Begin Your Investing Career Right With Some Mutual Fund Basics http://www.wisebread.com/begin-your-investing-career-right-with-some-mutual-fund-basics <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/begin-your-investing-career-right-with-some-mutual-fund-basics" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/cash-1722501-small.jpg" alt="cash" title="cash" class="imagecache imagecache-250w" width="250" height="196" /></a> </div> </div> </div> <p>Buying shares of a mutual fund is a simple way to get started in investing and build a sizable portfolio. You can select funds that mesh with your investment goals instead of having to analyze multiple stocks and bonds to find the right mix of securities suitable for your risk tolerance, expectations for investment growth, and other considerations. (See also: <a href="http://www.wisebread.com/the-duel-etfs-vs-mutual-funds">The Duel: ETFs vs. Mutual Funds</a>)</p> <p><a href="http://www.wisebread.com/mutual-funds-for-wise-bloggers">Learn the basics</a> to develop a foundation for making sound investing decisions.</p> <h2>Mutual Fund Defined</h2> <p>The U.S. Securities and Exchange Commission (SEC) provides <a href="http://www.sec.gov/investor/tools/mfcc/mutual-fund-help.htm">definitions of a mutual fund, its portfolio, and its investors</a>:</p> <ul> <li>Mutual fund: &quot;a company that brings together money from many people and invests it in stocks, bonds, or other assets&quot;<br /> &nbsp;</li> <li>Portfolio: &quot;the combined holdings of stocks, bonds or other assets the fund owns&quot;<br /> &nbsp;</li> <li>Investors: &quot;own shares, which represent a part of these holdings&quot;</li> </ul> <h2>Mutual Fund Types</h2> <p>There are many types of mutual funds and many ways to classify them. For example, you could categorize a fund by its management approach, market capitalization, or global emphasis. Note that some funds could be in more than one category. For example, a market-index fund based on the S&amp;P 500 (such as Fidelity's Spartan 500 Index Fund or E*Trade's S&amp;P 500 Index Fund), is passively managed, considered large-cap, and comprised of domestic stocks.</p> <p>Here are a few classifications that are often used to describe mutual fund types:</p> <p><strong>Actively vs. Passively Managed</strong></p> <ul> <li>Actively managed funds contain stocks that are handpicked according to criteria described in the prospectus.<br /> &nbsp;</li> <li>Passively managed funds include stocks in a <a href="http://www.investopedia.com/terms/m/marketindex.asp">market index</a>, such as <a href="http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--">Standard &amp; Poor's 500</a>, <a href="http://www.nasdaq.com/quotes/nasdaq-financial-100-stocks.aspx">NASDAQ 100</a>, or <a href="http://web.wilshire.com/Indexes/Broad/Wilshire5000/">Wilshire 5000</a>.</li> </ul> <p><strong>Capitalization</strong></p> <ul> <li>Large-cap funds contain mostly stocks of large, well-established companies with a market capitalization of more than $5 billion. (<a href="http://www.investorwords.com/2969/market_capitalization.html">Market capitalization</a> is the per share price of the stock multiplied by the number of outstanding shares.)<br /> &nbsp;</li> <li>Mid-cap funds consist primarily of stocks of mid-sized companies with a market capitalization ranging from $1 billion to $5 billion.<br /> &nbsp;</li> <li>Small-cap funds focus on stocks of businesses with a market capitalization of less than $1 billion.</li> </ul> <p><strong>Growth or Value</strong></p> <ul> <li>Growth funds own stocks of companies experiencing relatively high growth in earnings and/or revenue.<br /> &nbsp;</li> <li>Value funds own stocks of companies with share prices that are currently undervalued in the marketplace.<br /> &nbsp;</li> <li>Blend funds contain a mixture of <a href="http://www.axa-equitable.com/investments/growth-vs-value-two-approaches-to-stock-selection.html">growth and value stocks</a>.</li> </ul> <p><strong>Specialty </strong></p> <ul> <li>Sector funds invest in a specific market sector such as communications, utilities, or technology.<br /> &nbsp;</li> <li>Target-date funds allocate assets among stocks and bonds based on your anticipated retirement year. (The allocation is adjusted for lower risk as you near the retirement date.)<br /> &nbsp;</li> <li>Bond funds invest in U.S. Treasury, U.S. government agency, municipal, and/or corporate bonds.<br /> &nbsp;</li> <li><a href="http://www.wisebread.com/socially-responsible-investing-goes-green">Socially responsible funds</a> own stocks that have a social purpose, commit to certain environmental standards, or meet guidelines for being socially responsible.<br /> &nbsp;</li> <li>International funds invest in companies worldwide.</li> </ul> <h2>Mutual Fund Prices</h2> <p>Mutual fund prices are based on the value of fund holdings, figured at the end of each trading day. This number is called the <a href="http://www.investopedia.com/ask/answers/04/032604.asp">net asset value (NAV)</a>. It is calculated by adding the value of the fund's stock, bond, cash, and other assets, subtracting liabilities, and dividing the total by the number of outstanding mutual fund shares.</p> <p>Unlike stock prices, mutual fund prices do not fluctuate during the day and are not based on perceptions of market value but rather specific calculations. Shares are purchased by investors directly from mutual fund companies or third party resellers (such as online brokerage firms), rather than being traded among investors.</p> <h2>Mutual Fund Fees</h2> <p>There are many types of <a href="http://www.sec.gov/investor/pubs/inwsmf.htm#factors">fees associated with mutual funds</a>. Some are related to specific transactions; others reflect costs to manage and administer the fund. Typically, transaction-based fees are taken directly out of your invested funds whereas operating fees are calculated as a percentage of your shares, reducing the overall return on investment.</p> <p><strong>Transaction-Based Fees</strong></p> <ul> <li>Built-in sales commissions or sales loads that are charged as front-end loads when you purchase shares or back-end loads when you sell shares.<br /> &nbsp;</li> <li>Fees charged by your brokerage firm to buy or sell shares.<br /> &nbsp;</li> <li>Early redemption fees charged for selling shares soon after buying them, often within 90 days or less.<br /> &nbsp;</li> <li>Exchange fees for exchanging shares among funds in a fund family.</li> </ul> <p><strong>Operating Fees</strong></p> <ul> <li>Management fees paid to the investment advisor or fund manager for selecting securities that meet investment goals.<br /> &nbsp;</li> <li>Distribution or service fees (Rule 12b-1) to cover marketing costs.<br /> &nbsp;</li> <li>Other expenses, which include legal and administrative costs.</li> </ul> <h2>Prospectus</h2> <p>A prospectus provides information to investors about the mutual fund. According to the SEC, <a href="http://www.sec.gov/answers/mfprospectustips.htm">there are two kinds of prospectuses</a>: statutory (the fine print) and summary (key facts).</p> <p>The main things that you should consider when reviewing this information:</p> <ul> <li>Investment goals, objectives, and strategies.<br /> &nbsp;</li> <li>Fees and expenses as a percentage of holdings.<br /> &nbsp;</li> <li>Past performance to give you an understanding of recent and long-term performance <a href="http://www.wisebread.com/what-is-a-lipper-average-and-why-should-we-care">compared to market indexes or benchmarks</a>.<br /> &nbsp;</li> <li>Unusual risk factors, above and beyond typical investment risk.<br /> &nbsp;</li> <li>Portfolio turnover (how often stocks are bought and sold within the fund).</li> </ul> <p>Read the prospectus before you invest. Most are available as a download on website pages associated with the mutual fund.</p> <p>Note that there is risk involved in mutual fund investing. A return is not guaranteed, your money is not insured by the FDIC, and your investments may lose value. However, over the long term, owning shares in a mutual fund gives you the opportunity to earn returns typically much higher than interest from a CD or regular savings account.</p> <p><em>Are you invested in mutual funds? How active are you? Are there terms or concepts that seem confusing or unclear?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/begin-your-investing-career-right-with-some-mutual-fund-basics">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-step-plan-to-choosing-your-first-or-next-mutual-fund">The 3-Step Plan to Choosing Your First (or Next) Mutual Fund</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-investments-that-may-soar-during-trumps-term">8 Investments That May Soar During Trump&#039;s Term</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-stocks-to-buy-if-you-love-the-earth">5 Stocks to Buy If You Love the Earth</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-your-money-can-support-your-values">4 Ways Your Money Can Support Your Values</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-are-people-retiring-in-their-30s">How Are People Retiring in Their 30s?!</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment mutual fund basics Tue, 18 Jun 2013 10:24:31 +0000 Julie Rains 978220 at http://www.wisebread.com