This document discusses mutual funds and how to invest in them profitably. It explains that mutual funds allow investors to invest in a portfolio of assets managed by a professional. Index mutual funds aim to match the returns of a market index at low cost by holding the same securities in the same proportions. Actively managed funds aim to outperform the market through the stock picking abilities of the fund manager. The document advises investors to consider both fees and the historic performance of fund managers when choosing funds. It also discusses short-term trading fees and their role in reducing costs for long-term shareholders.
2. Although investing in mutual funds isn't the type of
subject associated with wild parties and celebrations - it
is something the serious investor should consider as a
way of increasing their total worth. "But what EXACTLY
is a mutual fund" I hear you ask - "how does it work,
who does what and how much do they cost?" Hang on,
slow down - one question at a time please.
3. If you believe markets are generally efficient and prefer
to invest in an index mutual funds to achieve an index-like
return, shopping for the best index mutual fund
based on low fees and a low expense ratio makes good
sense. The portfolio manager of an index mutual fund
endeavors to invest the fund's assets to track the index
as closely and cost-effectively as possible. Larger index
funds have an advantage in that they can spread their
operating costs over a larger asset base. Some of the
interesting index mutual fund options currently available
include no load index mutual funds like E*Trade S&P 500
Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index
Fund (Nasdaq: FSMKX), and Vanguard
4. 500 Index Fund (Nasdaq: VFINX) with expense ratios of
0.09%, 0.10%, and 0.18%, respectively.
5. 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
6. 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.
7. Ratings are significant in differentiating between good
and bad funds. So do a rigorous research while you
assess mutual funds. You must look at the quantifiable
and computable features of a fund and also check the
returns against the target, costs incurred, taxes liable,
risks involved and manager term. Although you can refer
the rating systems yet you must not just blindly invest in
the funds with best ratings. You must check the rating
against the real time performance of the mutual funds.
8. Some mutual funds impose short-term trading fees to
discourage frequent trading of mutual fund shares.
Frequent trading disrupts efficient management of the
mutual fund and increases operating expenses. A short-term
trading fee can therefore actually be beneficial to
long-term shareholders if the fee is rightly treated by the
mutual fund company.Fidelity Spartan Total Market
Index Fund (Nasdaq: FSTMX), for example, follows the
practice of returning short-term trading fees collected
on shares held less than 90 days to the mutual fund
itself rather than passing on the benefit to the mutual
fund company. By having this short-term trading fee
structure, this no load mutual fund seeks to contain
9. its operating expenses. Such fees are therefore aligned
with the interests of long-term shareholders of this
mutual fund.
10. So hunt around, compare not only price but also service
and past record to date. And remember - a mutual fund
is still based on products themselves that can reduce in
value as well as increase - so never invest more than you
can afford to be without, just in case!!