Get Even More Visitors To Your Blog, Upgrade To A Business Listing >>

The prerequisite of wise investment in mutual fund.

The stock market is a very interesting place for anyone who wants to make money from investment. There are many different ways to make money in the market, which includes either investment in stocks, bond or even in a more emerging trend the Mutual funds market. Investing in the Mutual Fund can b e very lucrative, but before we go on with it’s numerous advantages let’s put the hat before the cat or is it the horse before the cart.
Mutual fund is an investment system in which money from many people are pooled together and invested into stocks, bonds and other assets. These pooled funds are used invested into different types of portfolio such as stocks, securities, bonds and cash instruments. The investment company's final goal is to meet the financial targets of every investor and to earn money. Investors earn their profits in mutual funds through dividends on stocks and interest on bonds.
In mutual fund investment, investors have the freedom to sell their shares whenever they want, at the current market price. Or your mutual fund asset manager can sell off your securities at a high price for you, when there is an increase in prices of your securities.
The fund manager also completes analysis and studies of the market trends prior to investing. The investments are managed by fund manager who controls the fund and collects the investments and invests it into stocks, bonds or other assets in order to diversify the portfolio thereby making sure that there is very low risk involved and to attain best possible return on the investment for you
Definitions of some key mutual funds concepts.
Are you thinking about investing in the stock market? . Here are a few key mutual fund concepts.
Investment Portfolio: This is the total holding of the bonds and stocks in which each investor of mutual fund owns a share of the company invested in.
Load: This is the up-front fee your fund manager charges for investing in the fund. Whatever load you pay goes straight to the mutual fund and anyone that happened to be marketing the fund. Paying a load is simply paying an extra, unnecessary fee so always invest in no-load mutual funds.
Net asset value: This is the closing price of the mutual fund after a day's trading. You can see how well the mutual fund is performing by changes in its NAV.
Management Fee: This is the fee the mutual fund manager charges you for investing your money for you. All mutual funds manager has a management fee; otherwise they would not be able to operate. However, do not pay too high in management fee. Look for mutual funds that charge management fees of 1.5% or less.
Morningstar Rating: This is the rating the mutual fund was given due to its past performance compared to its peers. While past performance is not a guarantee of future performance, it is a somewhat useful indicator in helping you decide whether or not you want to trust your money to this mutual fund or not. Remember though that the mutual fund's performance will largely be a result of the fund's chief manager.
Net Assets: This is how much money the mutual fund manages. Some mutual funds just manage $100-$200 million of investor's money. Others manage up to $50 billion. The advantage of a larger mutual fund is that they sometimes charge lower fees due to efficiencies of scale. However, in general, a smaller mutual fund is better. This is because they are more nimble and can invest in more of a variety of companies. The larger mutual funds have to invest in very large companies. After all, if a $50 billion mutual fund invested in a $500 million, just parking 1% of the fund's assets would buy the whole company!

Price: The price of the security is what it sells for on the market in that instant. For mutual funds, most pricing is completed at the close of market. The price will allow investors to determine much they are paying for the income generated by the investment.
Face Value: this is usually amount a bond worth’s after maturity. Most often, the face value of a bond is usually $100 or a derivative thereof, like $100,000. Most fund companies and Morningstar usually reports their price based on a $100 face value.
Coupon Rate. This is the rate of interest that the fixed income investment pays over the duration of the bond. If the rate is 5%, then the bond with a face value of $100 will pay $5 per year. While individual coupon rates are irrelevant to an income mutual fund, the fund's average coupon rate will provide investors with an idea as to the direct income generated from the portfolio of funds.
Duration: This is the average amount of time that the fund's bond portfolio will mature in. A high coupon and low duration during periods of low rates suggests that returns will suffer, whereas a long duration and high rate in period of low rates suggest good income with the potential for dropping asset values.
Benefits of investing in mutual fund.
1. Low entry point: In order to fully participate in the market, you normally need six figures (or more if you want to really diversify your holdings). Mutual funds allow you to start with as little as $25 per month or an initial investment of just $500.
2. Wide Diversification: A mutual fund gives you stock market exposure, and the professional selections of a seasoned stock picker. Most funds have more than 40 individual holdings (mostly, they hold more than 100 different securities).
3. Professional Management: Due to the wide nature of the investment, there is a very high presence of professional management that helps to ensure an increased profit making and a reduced loss percentage.
4. Variety of offerings: Because of the large nature of the market, there are a wide variety of funds to choose from which will ensure a well-balanced portfolio.
5. Easy transaction: Purchasing mutual funds certificates or selling them is very easy, which makes it convenient for every type of investment.
How to invest in the mutual fund.
Buying mutual funds is just like making any other purchase but it can have grave consequences if you make the wrong choice. Due to the large number of mutual funds available, a good investor has to review and compare each of them before deciding which one to buy.
Some of the ways in which to decide on the fund to invest are;
Compare Logically

As a first step, mutual fund ratings and historical rates of return provide a good basis to compare them but that is not sufficient. Due not rely heavily on past performance to make the comparison believing that since the past performance of a fund has been good, the future performance of the fund will also be good. Although this can be a good basis of comparison but ensure that the ratings are obtained from a reliable source such as the Morningstar. Do not always depend on the number of stars made in the past by funds because due to nature of the market this always changes.
Furthermore, why deciding on which mutual fund to buy, compare similar types of funds. Do not compare a one fund with another fund that is not on the same family. In order to choose the best mutual funds for investment, you should compare them in the following five areas.
• Management • Standard Deviation • Fees • Relative Performance
Other Statistics
You should also look into other factors like:
Arithmetic Mean; Coefficient of Variation; Standard Deviation; Risk-Adjusted Return; Sharpe Ratio; beta and Treynor Ratio
All these statistics are available in major sites like Yahoo. Or visit your financial advisor for a watered down explanation. Also buy mutual fund investment books and study (click to buy). Do your research for it is necessary to understand these terms in order to make comparisons. However, this might not be easy. One aspect that must be taken into consideration is the risk ratio. It is only by taking risks that you can achieve returns in excess of what other low risk funds might offer. It is only by making a thorough analysis of the above important aspects that you can compare mutual funds accurately and take the right decision
Performance
The first thing you should look out for is whether the mutual fund you are planning to invest in is outperforming or under-performing with respect to the market. Good and safe mutual funds are those that consistently outperform the market. Changes in the net asset values (NAVs) of such mutual funds are consistently one step ahead of the market. For example, if the index that measures market movements goes up, the NAV of most good and safe mutual funds will also move up at least as much as the market or even more than the market. On the other hand, when the market moves southwards, the NAV of most good and safe mutual funds will move down but such depreciation will be less than or at the most equal to the market's downward movement. Unsafe or risky mutual funds are those where the opposite occurs.
Churn and earn
The next thing to watch out for is whether the mutual fund is undergoing too much "churn and earn". This means you have to check whether too many transactions by the mutual fund are resulting in higher fees or costs to the investor. In this context, the worst offenders are those mutual funds that have a lot of spurious (i.e.: false) churn. Every time a mutual fund buys or sells stocks, the broker or brokers it employs make a neat pile from the commissions. So, these brokers try to encourage a lot of churn or buying and selling of stocks.
Many restrictions
Risky and unsafe mutual funds are also characterized by having too many restrictions on how and when investors can sell or redeem their mutual fund shares. Mutual funds that have too many long lock-in periods or those which slap a hefty exit load at the time of redemption should be eyed with suspicion and are likely to prove to be unsafe and risky.
Beware of scams
Finally, there are mutual funds that are outright scams. There have been reports of fund mangers selling stocks at prices other than what has been reported to the investor. For example, the fund manager may have sold stock at prices that prevailed before closing of the day's trade although the investor is told that the transaction took place at closing prices, which were lower. The manager then pockets the difference and with most such transactions involving large volumes, even a fractional price difference can lead to substantial gains for the manger.
In conclusion, always note that in every investment, there are a certain amount of risk involved, but what differentiate smart investors from ordinary ones is that smart investor are not deceived by enormous profit being promised by some investment packages. So for you to invest wisely you must do a very careful study and analysis on the type of investment you to put in your hard earned funds in. Remember that you are investing not because it is a must have but because you wants to better you lifestyle and take precautions. So always bear in mind that fools rush into a place where wise men fear to tread. It is your decision that singles you out.



This post first appeared on Fundsadvisors, please read the originial post: here

Share the post

The prerequisite of wise investment in mutual fund.

×

Subscribe to Fundsadvisors

Get updates delivered right to your inbox!

Thank you for your subscription

×