Metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used proxy for the U.S. stock market, are hardly at bargain levels. This has lead several market pundits to predict single digit annual returns for domestic mutual funds over the next decade. While pursuing the search for the best mutual fund, some mutual fund investors tend to focus exclusively on fees and expense ratios. The rationale is that by choosing mutual funds with low fees, investors will have more of their capital invested. Also, no load mutual funds with low expense ratios will pass on more of the returns they earn to their shareholders. Is shopping for the lowest fees and expense ratios a smart way to select mutual funds? Not always. The answer depends on the type of mutual fund you are evaluating, the time you can devote to evaluating and managing your mutual funds investments, and the type of cost incurred.
Like any other corporation, in exchange for cash the mutual funds issues shares of stock to investors. However unlike most corporations, mutual funds do not issue a fixed quantity of stock but with new investments new shares are issued. A mutual fund may be either an actively managed fund or an indexed mutual fund. A fund manager alters actively managed funds regularly in order to maximize their profitability. They fund manager inspects the market and the sectors a fund invests in and reallocate the fund appropriately. An indexed fund follows a different approach by simply taking one of the major indexes and buying according to that index. Indexed funds change much less repeatedly than actively managed funds. However, an active fund is more profit making. Mutual funds provide transparency, efficient performance, liquidity, tax benefits and a wide range of schemes
Mutual fund fees and expenses are just one of several important factors to consider if you believe portfolio managers can add value and out-perform the index through active management. The portfolio manager's ability and investing style are just as important. Therefore, seeking out the best mutual fund based on just low fees and a low expense ratio may not always be the right approach. It may just be a case of being 'penny-wise and pound-foolish'. Legendary investor Peter Lynch, who managed the Fidelity Magellan Fund (Nasdaq: FMAGX) from 1977 to 1990, achieved returns well in excess of the market averages even after accounting for the fund's fees and expenses. So too has Bill Miller who currently manages the Legg Mason Value Trust (Nasdaq: LMVTX). Even after accounting for its relatively high 1.7% expense ratio, this no load mutual fund has achieved compound annual returns of 18.6% for the 10 year period ending in 2004, well in excess of 12.0% for the Vanguard 500 Index mutual fund.
Who does what? Mutual funds basically take your money, combine it with the money of other investors like you and then invest the total pool of money in investments with the best possible return. The returns from the fund are then split to the accounts that bought in by the amount of shares that each person owns. The fund managers then take their cut based on the fees that they charge you and you get your return. These guys are worth it for the money they make you, so why not let them drive the car for a while and let you get the glory? Different investment plans are a staple of the field, allowing investors to do so on a regular amount weekly, monthly, or however else you want to set it up. Continuously invested accounts tend to get a higher yield on average, but if you don't have the ability to do that, you can still make money. Dollar cost averaging should be your goal; it is the strategy of the top investment experts in the country.
How much do they cost? Different mutual funds have different types of fees involved with them as well. Some will charge you an up front percentage of your investment (front load). Some will charge you a percentage of the investment when sold, this is a back end load. Then there are no-load funds which charge you nothing more than the annual operating fees. An individual should seek to only use the no load funds since it saves a lot of your money. There are really no advantages to using a loaded fund unless it offers some incredibly returns. But normally you can find the same returns by several different fund companies.
You must not be lured into investing in the currently best performing fund. But you must go for mutual funds that have low purchase rate and are high on selling. However, even the good funds cannot overwhelm the trend of market. So be careful in choosing funds that can be strong in a low market trend. Moreover, you must go through the prospectus to read the risk tolerance. Moreover, diversifying into many mutual funds does not diminish your risk or increment your return. So before moving on to mutual funds in 2007, one final point is that the type of fund wholly relies on your investment goals. Different funds prevail in market and you can choose depending on your aims whether they are retirement, income, expansion, educational needs etc.
Like any other corporation, in exchange for cash the mutual funds issues shares of stock to investors. However unlike most corporations, mutual funds do not issue a fixed quantity of stock but with new investments new shares are issued. A mutual fund may be either an actively managed fund or an indexed mutual fund. A fund manager alters actively managed funds regularly in order to maximize their profitability. They fund manager inspects the market and the sectors a fund invests in and reallocate the fund appropriately. An indexed fund follows a different approach by simply taking one of the major indexes and buying according to that index. Indexed funds change much less repeatedly than actively managed funds. However, an active fund is more profit making. Mutual funds provide transparency, efficient performance, liquidity, tax benefits and a wide range of schemes
Mutual fund fees and expenses are just one of several important factors to consider if you believe portfolio managers can add value and out-perform the index through active management. The portfolio manager's ability and investing style are just as important. Therefore, seeking out the best mutual fund based on just low fees and a low expense ratio may not always be the right approach. It may just be a case of being 'penny-wise and pound-foolish'. Legendary investor Peter Lynch, who managed the Fidelity Magellan Fund (Nasdaq: FMAGX) from 1977 to 1990, achieved returns well in excess of the market averages even after accounting for the fund's fees and expenses. So too has Bill Miller who currently manages the Legg Mason Value Trust (Nasdaq: LMVTX). Even after accounting for its relatively high 1.7% expense ratio, this no load mutual fund has achieved compound annual returns of 18.6% for the 10 year period ending in 2004, well in excess of 12.0% for the Vanguard 500 Index mutual fund.
Who does what? Mutual funds basically take your money, combine it with the money of other investors like you and then invest the total pool of money in investments with the best possible return. The returns from the fund are then split to the accounts that bought in by the amount of shares that each person owns. The fund managers then take their cut based on the fees that they charge you and you get your return. These guys are worth it for the money they make you, so why not let them drive the car for a while and let you get the glory? Different investment plans are a staple of the field, allowing investors to do so on a regular amount weekly, monthly, or however else you want to set it up. Continuously invested accounts tend to get a higher yield on average, but if you don't have the ability to do that, you can still make money. Dollar cost averaging should be your goal; it is the strategy of the top investment experts in the country.
How much do they cost? Different mutual funds have different types of fees involved with them as well. Some will charge you an up front percentage of your investment (front load). Some will charge you a percentage of the investment when sold, this is a back end load. Then there are no-load funds which charge you nothing more than the annual operating fees. An individual should seek to only use the no load funds since it saves a lot of your money. There are really no advantages to using a loaded fund unless it offers some incredibly returns. But normally you can find the same returns by several different fund companies.
You must not be lured into investing in the currently best performing fund. But you must go for mutual funds that have low purchase rate and are high on selling. However, even the good funds cannot overwhelm the trend of market. So be careful in choosing funds that can be strong in a low market trend. Moreover, you must go through the prospectus to read the risk tolerance. Moreover, diversifying into many mutual funds does not diminish your risk or increment your return. So before moving on to mutual funds in 2007, one final point is that the type of fund wholly relies on your investment goals. Different funds prevail in market and you can choose depending on your aims whether they are retirement, income, expansion, educational needs etc.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Market Changes Due To The Spot Price Of Gold You have full permission to reprint this article provided this box is kept unchanged.
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