Mutual Funds
Mutual Funds
Mutual funds offer the investor immediate
diversification into carefully selected and managed
securities. An investment program can be started for a
small amount of money (typically $500-$1,000) and
subsequent purchases can be as small as $50.
Automatic reinvesting of capital gains and dividends
will speed up the growth of the investment.
A mutual fund is a professionally managed,
diversified portfolio of securities, such as stocks or
bonds. The great appeal of mutual funds is that the
investor shoulders none of the investment decisions or
timing decisions required by individual stock
investing.
Mutual fund portfolio managers are trained in
finance and have years of experience managing
portfolios. Many funds have in-house analysts and
research staffs to review financial and economic data
and to select securities that represent the best values
for capital appreciation or income.
A diversified portfolio of stocks or bonds reduces
risk. Financial research has shown, for example, that
60 percent of the time a stock's price moves in tandem
with the overall market. That movement represents
market risk. Twenty to thirty percent of the time, a
security's price is determined by specific information
about a company and/or its industry's outlook. Luck is
the final factor that can influence a stock's price.
Portfolio managers have little control over market
risk or the vagaries of the financial markets. If the
stock market is moving higher, portfolios will
generally register gains. Diversification, however,
will protect investors against non-market risk.
Most well-diversified mutual funds with asset
values of more than $200 million hold from 50 to
several hundred issues. As a result, by holding a
large number of issues and maintaining a portfolio that
tracks the broad market, a few poorly performing issues
should not hurt the overall performance of the fund.
The majority of investment companies have a group
of mutual funds with different investment objectives
from which to choose, and over the past two decades the
number of mutual funds to choose from has increased
dramatically. Generally, investors have the option to
make a telephone call and switch out of their existing
funds into other funds as their financial needs or
investment conditions change. (Switching some funds
may incur a charge.) Once an investor account has been
established, future investments can be made by
telephone directives.
In addition, mutual funds represent a low cost way
to invest in the financial markets, as opposed to
frequent trading on the major exchanges. Management
fees for running the portfolio are usually 0.5 percent
or less, depending on the total assets of the fund.
Fund performance can be tracked easily, and historic
information is readily available.
Mutual funds can be purchased with or without
sales charges. These are referred to as "load" and
"no-load" funds respectively. No-load funds have no
sales representatives, and, therefore, no commissions
need to be paid. (This does not mean, however, that
there will never be any fees charged to the investor on
a long-term basis.) An investor must carefully choose
a fund; often a load fund may outperform a no-load
fund, thus equalizing any initial sales charges paid.
There is no guarantee that either a load or a no-load
fund will outperform the other during an extended
investment cycle.
Investors should not expect to get rich quickly
from mutual fund investments, nor should they
experience high losses. Overall, however, the
opportunities for the individual investor may be
greater with mutual funds than with individual stock or
bond issues. Long-term planning is the key and, as
with other investments, patience is a virtue.
Family of Funds
Many mutual funds have a broad spectrum of funds
to meet the
needs and temperaments of various investors. A typical
family of funds might include the following:
MONEY MARKET FUNDS SECTOR FUNDS
- Invest in short-term money - Concentrate on a
particular
market instruments. area of the
economy.
- Yields fluctuate daily. - Typical areas
include:
- Good during periods of technology,
health, energy,
high interest rates. utilities,
precious metals,
etc.
MUNICIPAL BONDS FUNDS
- Invest only in Muni. Bonds AGGRESSIVE GROWTH
FUNDS
- Provide TAX-FREE Income - Very volatile.
- May be state tax exempt - Invest in high-
performing
- May be subject to Alter- stocks.
native Minimum Tax - High risk/high
return
potential.
BONDS FUNDS
- Invest in debt-type GROWTH FUNDS
instruments. - Invest mainly for
capital
- Relatively high yield. growth.
- Market value fluctuates - Vary greatly -
read offering
inversely to interest prospectus to
establish
rates. objectives of
fund.
INCOME FUNDS GROWTH & INCOME
FUNDS
- Seek maximum income. - Also called
Balanced Funds.
- Invest in bonds, - Seek capital
appreciation
preferred or high yield and income from
dividends
stocks. or fixed income
investments.
Exchange Privilege
Exchange from one fund to another may be allowed
at any time
for a nominal fee (usually $5) and no commission
charge. There
will be tax consequences at the time of exchange if
there is a
profit or a loss.
Load Funds Can Be a Bargain
When it comes to investing in mutual funds, one of
the choices investors must make is whether to select a
"load fund" or a "no-load fund." To make the right
decision, it's important to understand the differences
between the two types of funds.
A load mutual fund charges an up-front sales fee,
or load, when you buy it. A portion of the sales
charge goes to the broker/dealer who represents the
fund. For that fee, the broker/dealer explains the
fund and is obligated to see that it meets your
objectives. The load further obligates the
broker/dealer to continue servicing your account for as
long as you own the fund.
No-load funds, on the other hand, charge no
up-front sales fee. This can be an enticing feature
for many investors. When comparing mutual fund costs,
however, it is not only important to consider the
up-front costs of buying the fund, but also to
understand the fund's ongoing annual expenses.
For example, rather than paying registered
investment representatives to offer their shares and
service your account, no-load funds offer their shares
through ongoing advertising. One example of this was
the 1993 Forbes Mutual Fund edition, in which about 83
percent of the mutual fund advertisements were bought
by no-load funds. The cost of all that advertising is
paid by the no-load fund before any of the earnings get
to you.
To illustrate this, let's look at a $100,000
investment in two hypothetical funds, each compounding
at the same 12 percent gross annual return (Table 1).
Fund A is a load fund with a 3.5 percent up-front
charge and annual expenses of 0.6 percent. Fund B is a
no-load fund with no up-front charge and annual
expenses of 1.8 percent.
The load fund charges $3,500 up front. However,
because of lower ongoing expenses, the value of the
load fund surpasses that of the no-load fund in four
short years. After 20 years, Fund A is $138,407 ahead
of Fund B. Kiplinger's Personal Finance Magazine
summed up this example in an article that stated,
"Front-end loads are a pittance when spread over many
years."
The debate over load and no-load funds will
undoubtedly continue with valid arguments on both
sides. As with any investment, however, it's up to you
to make an informed decision before you write your
check.
TABLE 1
$100,000 Investment
Fund A Fund B
3.5% Load No Load
12% Gross Annual Return 12% Gross
Annual Return
0.6% Annual Fee 1.8% Annual Fee
11.4% Actual Annual Return 10.2% Actual
Annual Return
Start $96,500 $100,000
Year 1 107,501 110,200
Year 2 119,756 121,440
Year 3 133,408 133,827
Year 4 148,616 147,477
Year 5 165,559 162,520
Year 6 184,432 179,097
Year 7 205,458 197,365
Year 8 228,880 217,496
Year 9 254,972 239,681
Year 10 284,039 264,128
Year 15 487,309 429,263
Year 20 836,047 697,640
Chasing Winners Can Make You a Loser
Serious investing is done with the future in mind;
yet, some investors are tempted to look only at the
current hot performers when picking stocks. After all,
because we can't predict the future, going with today's
best-performing investment may seem to make sense,
right? Wrong. One way to illustrate the folly of this
practice is by looking at what happens when you always
follow last year's top-performing mutual fund.
Let's assume that on Jan. 1, 1973, you invested
$10,000 in the best-performing fund of 1972. On Jan. 1
for the next 20 years, you moved your investment to the
best-performing fund of the previous year. Assuming
all capital gains and dividends were reinvested, and
allowing for all sales and redemption charges, Table 1
shows, year by year, what would have accumulated by
switching to each year's top performer. By Dec. 31,
1992, your original $10,000 would have grown to
$95,571. That's not a bad return, even considering
these were good years for stocks. It even beat the
market as a whole by about 10 percent.
But what would have happened if you had made a
one-time, $10,000 investment on Jan. 1, 1973, in a
conservatively managed growth-and-income fund, and you
let it compound undisturbed for the same 20-year
period? The table shows the results of three such
funds -- Fund A grew to $107,915, Fund B to $122,724
and Fund C to $126,109. All three outperformed the
investor who switched to the best performer of each
year.
None of these three funds was ever recognized as
the top performer in any of those 20 years. In fact,
they seldom or never even made the top performance
lists of financial publications that rate mutual funds
annually. The secret of their success was to
consistently aim for reasonable investment results,
total return or a combination of growth and income.
The examples show that consistent results without
big surprises can put you ahead over the long haul. It
beats trying to chase winners.
TABLE 1
$10,000 Investment Moving $10,000
One-Time to Previous Year's Top Fund
Investment in One Fund
Year Fund A Fund B Fund C
1973 $8,501 $7,842 $8,417 $8,572
1974 8,729 6,435 7,076 7,091
1975 10,509 8,712 9,563 10,257
1976 15,396 11,290 12,838 13,457
1977 18,460 11,000 13,088 12,919
1978 23,555 12,616 14,748 13,937
1979 16,961 15,035 17,926 15,947
1980 27,256 18,227 22,471 19,716
1981 23,658 18,387 24,227 21,204
1982 40,426 24,597 31,504 28,564
1983 50,300 29,557 39,110 36,037
1984 38,653 31,528 41,594 39,100
1985 49,206 42,056 54,317 51,660
1986 80,759 51,197 64,392 63,283
1987 85,825 53,981 67,239 64,167
1988 77,661 61,180 75,879 75,496
1989 102,434 79,170 95,041 97,362
1990 67,402 79,710 93,499 93,601
1991 130,106 100,867 113,809 115,593
1992 95,571 107,915 122,724 126,109
Interesting Facts About Mutual Funds
Mutual funds are a relatively straightforward
investment; however, individual investors may not be
aware of a lot of the interesting trivia concerning
mutual funds. The Investment Company Institute (ICI),
the Washington, D.C.-based voice of the mutual fund
industry, recently sent out a list of interesting facts
about mutual funds, including:
* The term "mutual fund" is not synonymous with
the stock market. The almost $2 trillion invested in
mutual funds is almost evenly divided among stock, bond
and money-market funds.
* Contrary to popular belief, the "boom" in
mutual funds did not begin in the 1990s. Rather,
during the decade of the 1980s, fund assets increased
from $95 billion to $1 trillion.
* An increase in mutual fund assets is not the
same as an increase in cash flow. For example,
combined assets of stock and bond funds have increased
by $776 billion since 1990. However, only $446 billion
of that represents new investments. The remaining $330
billion comes from the earnings and appreciation
(rising values) of existing stock and bond portfolios.
* Most of the "new" money being invested into
mutual funds is not from bank CDs or unsophisticated
"savers" who have never invested. Recent studies
indicate that most new mutual fund money is being
invested by people who are already mutual fund
shareholders.
* There were no massive liquidations by stock
mutual fund managers on Oct. 19, 1987, the day the
stock market crashed more than 500 points. On that
day, only 2 percent of stock fund assets were redeemed
by shareholders. Two-thirds of those redemptions were
taken from the funds' existing cash positions, which
served as a buffer and prevented greater selling in a
falling market.
* Although mutual funds are not guaranteed or
insured, they are heavily regulated under federal and
state securities laws. No mutual funds have
"collapsed" or "gone bankrupt" since the Investment
Company Act was passed in 1940.
* A substantial amount of mutual fund assets are
in the form of municipal bond funds, which invest in
the debt offerings of state and local governments.
These funds play a vital role in paying for public
services and infrastructure.
* Of the total assets invested in mutual funds,
about $390.5 billion is long-term money in retirement
plans.
* Factors contributing to the mutual fund
industry's current success include the maturing of 77
million baby boomers, declining interest rates, the
growth of defined contribution retirement plans, the
massive refinancing of home mortgages and the large
number of involuntary lump-sum distributions to
participants in pension plans.
* Mutual fund shareholders are not the "rich."
The median household income of mutual fund shareholders
is $50,000, meaning that one-half have incomes below
that figure.
Regulation of the Mutual Fund Industry
The first mutual fund began in the United States
in 1924, and in the years that followed, the demand for
securities grew at an unprecedented rate. Then, in
1929, the U.S. stock market crashed, followed by a
worldwide depression. These events signaled the need
for federal control of securities, including mutual
funds.
Today, mutual funds are among the most strictly
regulated investments under federal securities laws.
They are regulated by five major statutes:
The Securities Act of 1933. This act established
a number of filing requirements for all mutual funds,
including the filing of detailed registration
statements with the Securities and Exchange Commission
(SEC). It also requires funds to regularly disclose
detailed information about their operations to the SEC,
state securities boards and shareholders. Further,
this disclosure must be uniform, providing the same
information to all audiences. Under this act, funds
also must provide potential investors with current
prospectuses (updated annually) describing each fund's
management, objectives, risks, investment policies and
other essential data. The act also approved but
limited all mutual fund advertising. The provisions of
the act are still in effect.
The Securities Exchange Act of 1934. This
legislation regulates the purchase and sale of mutual
fund shares. It subjects distributors to anti-fraud
provisions that are monitored and enforced by the SEC
and National Association of Securities Dealers (NASD).
The Investment Advisers Act of 1940. This act
regulates the activities of mutual fund advisers.
Specifically, it focuses on self-dealing and conflicts
of interest within mutual funds, and it guards against
charging shareholders excessive fees. In 1992, the SEC
prepared a 500-page document with recommendations for
updating this act; some changes may be forthcoming.
The Insider Trading and Securities Fraud
Enforcement Act of 1988. This law requires investment
advisers and broker/dealers to develop and enforce
strict procedures to prevent insider trading. Insider
trading occurs when people with access to information
not available to the general public use that
information for their own benefit. The act also
expanded the SEC's authority to regulate insider
trading.
The Market Reform Act of 1990. This latest
securities act gives the SEC authority to halt
securities trading and/or restrict program trading, or
automated computer trading, usually of huge blocks of
securities. This law was brought about by the
500-point decline in the Dow Jones Industrial Average
on October 19, 1987; its purpose is to prevent such
drastic drops from occurring again.
In addition to these federal laws, each state has
its own securities regulations pertaining to mutual
funds. Federal and state laws are all designed to
ensure that mutual funds are operated and managed in an
open, consistent way so that investors receive the
information they need to make investment decisions.
The first mutual fund began in the United States
in 1924, and in the years that followed, the demand for
securities grew at an unprecedented rate. Then, in
1929, the U.S. stock market crashed, followed by a
worldwide depression. These events signaled the need
for federal control of securities, including mutual
funds.
Today, mutual funds are among the most strictly
regulated investments under federal securities laws.
They are regulated by five major statutes:
The Securities Act of 1933. This act established
a number of filing requirements for all mutual funds,
including the filing of detailed registration
statements with the Securities and Exchange Commission
(SEC). It also requires funds to regularly disclose
detailed information about their operations to the SEC,
state securities boards and shareholders. Further,
this disclosure must be uniform, providing the same
information to all audiences. Under this act, funds
also must provide potential investors with current
prospectuses (updated annually) describing each fund's
management, objectives, risks, investment policies and
other essential data. The act also approved but
limited all mutual fund advertising. The provisions of
the act are still in effect.
The Securities Exchange Act of 1934. This
legislation regulates the purchase and sale of mutual
fund shares. It subjects distributors to anti-fraud
provisions that are monitored and enforced by the SEC
and National Association of Securities Dealers (NASD).
The Investment Advisers Act of 1940. This act
regulates the activities of mutual fund advisers.
Specifically, it focuses on self-dealing and conflicts
of interest within mutual funds, and it guards against
charging shareholders excessive fees. In 1992, the SEC
prepared a 500-page document with recommendations for
updating this act; some changes may be forthcoming.
The Insider Trading and Securities Fraud
Enforcement Act of 1988. This law requires investment
advisers and broker/dealers to develop and enforce
strict procedures to prevent insider trading. Insider
trading occurs when people with access to information
not available to the general public use that
information for their own benefit. The act also
expanded the SEC's authority to regulate insider
trading.
The Market Reform Act of 1990. This latest
securities act gives the SEC authority to halt
securities trading and/or restrict program trading, or
automated computer trading, usually of huge blocks of
securities. This law was brought about by the
500-point decline in the Dow Jones Industrial Average
on October 19, 1987; its purpose is to prevent such
drastic drops from occurring again.
In addition to these federal laws, each state has
its own securities regulations pertaining to mutual
funds. Federal and state laws are all designed to
ensure that mutual funds are operated and managed in an
open, consistent way so that investors receive the
information they need to make investment decisions.
Mutual Funds Offer Many Convenient Services
In addition to the benefit of professional money
management, mutual funds offer a variety of services,
usually at no cost to their shareholders. These
services are outlined in the fund's prospectus and can
mean lifelong investing without ever having to sell
your fund or move from the mutual fund group. Of
course, to fully benefit, you must understand and
properly utilize these services.
One common service is the exchange privilege. If
your financial circumstances change and you want to
adjust your portfolio, the exchange privilege allows
you to easily move your mutual fund investment to
another fund managed by the same "family of funds."
Because of this service, it is important to examine all
the funds offered by a mutual fund family before you
invest.
Another shareholder service, called automatic
reinvestment, allows all dividends and capital gains to
be reinvested automatically, providing additional
growth potential through compounding. Reinvestment
also can be used to make automatic monthly investments
by authorizing the fund to draw a specified sum from
your checking account each month.
To help with record-keeping, mutual funds provide
a confirmation statement every time activity occurs
within your account. At the end of the year, funds
also provide 1099-DIVs, which show the amount and tax
status of distributions paid during the year. And, to
eliminate the problem of lost or destroyed
certificates, mutual funds can have certificates held
by a custodian bank at no cost.
Most mutual funds also offer IRS-approved,
trusteed prototype retirement plans for Individual
Retirement Accounts (IRAs), Simplified Employee Pension
Plans (SEPs), retirement plans for employees of
non-profit organizations (403(b)s), and retirement
plans for the self-employed.
Load funds -- funds that charge up-front fees --
often offer discounts for larger investments, whether
made at one time or over a period of time. Discounts
typically apply to investments of $10,000 or more in
one fund or a combination of funds within a family.
The "right of accumulation" service allows you to
qualify for the discount by adding any new purchase
within a family to the value of your existing shares.
Or, if you plan to make a sizable deposit over a
13-month period, you can sign a statement of intention,
without obligation, entitling you to the maximum
discount applicable to the total amount you plan to
invest.
Mutual funds offer a wide range of services in
addition to professional money management. If you own
mutual funds now or plan to invest in them in the
future, ask your representative about shareholder
services. They can offer substantial benefits at a
price you can't refuse.
What You Should Know About Systematic Withdrawal
Systematic withdrawal is a service offered by many
mutual funds. At your request, the fund will send you
regular checks for a specified amount. This can be a
real benefit to individuals who need monthly checks to
help meet living expenses.
Most mutual funds with a growth-and-income
objective pay quarterly dividends and annual capital
gain distributions. With systematic withdrawal, you
can have part of the total return (dividends plus
capital gains) distributed to you each month.
For example, assume a fund has historically
averaged a total annual return of 12 percent,
consisting of a 4 percent average annual dividend and
an 8 percent average annual gain. You set up an
annual systematic withdrawal of 10 percent, leaving
your principal undisturbed as well as adding about 2
percent a year to its value. As long as the fund
continues to earn 12 percent or more, your investment
is working as planned.
However, what if the mutual fund has an unusually
bad year? Suppose the fund is able to maintain its
regular 4 percent dividend, but due to a declining
market, there are no capital gains. If you continue to
withdraw the same amount, the fund will be required to
return part of your principal, and eventually you could
run out of money.
To use systematic withdrawal properly, think of
your fund as a bucket full of water. At the bottom is
a faucet from which you regularly draw a cup of water.
As long you replace this with as much or more water
than you withdraw, you will continue to have plenty of
water. But if you continue to withdraw more than you
replace, your water level will decrease, and your
bucket may eventually run dry. The same happens if you
systematically withdraw more than your fund is earning
-- your principal will decrease, and your investment
may eventually run dry.
Does this mean you should avoid systematic
withdrawal? Not at all. It just means that
flexibility is the key. If total return decreases,
decrease your withdrawal. By taking smaller
withdrawals, you can monitor your investments until the
principal begins to grow and builds a cushion. Or you
can delay beginning withdrawals until the initial
investment has grown.
Systematic withdrawal from carefully selected
mutual funds can be an excellent way to receive regular
income and still allow your investments to grow. But
it requires understanding, monitoring and the
flexibility to adjust to economic changes.
Mutual Funds May Not Be What You Thought You Bought
Did you know that your U.S. government bond fund
could invest as much as 35% of its assets in junk
bonds? Or that your global equity portfolio includes
U.S. stocks?
A mutual fund can use a certain name if, under
normal market conditions, at least 65% of its assets
are invested in that category, according to Securities
and Exchange Commission guidelines.
For funds that call themselves tax-exempt, the
minimum mix is 80% tax-exempt and 20% other assets. If
a fund uses the term municipal, the requirement drops
back down to 65%.
Confused? How about the terms "global" and
"international"?
The dictionary defines global as involving the
world and international as reaching beyond national
boundaries. So it should come as no surprise to the
literally minded that global funds include U.S. stocks
or bonds, while international funds don't? But many
people don't realize this.
It is not the intention of the SEC to give license
for funds to mislead investors, but to allow those
funds the ability to have good management.
An investor can find out generally what a fund can
invest in by consulting its prospectus, and can
discover exactly what a mutual fund owns at a
particular point in time by consulting its annual or
semiannual report.
The report will list all the holdings as of a
certain date, including complicated assets like
derivative securities and forward currency positions
that might never get mentioned in the fund's
prospectus. If you want to find out what the fund is
investing in, the annual report is critical.
Such a snapshot report is not perfect, but it
gives investors a better understanding of a fund. If
you want a current portfolio mix, call the fund sponsor
to ask for a fax of the fund's current portfolio.
Finding out exactly what a mutual fund owns as
well as what it could buy is crucial information for
investors. It strikes at the heart of what is
happening with your money and what could happen to the
money, including the risks that are taken.
The prospectus, often a drab legalistic document,
lays out the parameters of the fund's investment
policies, objectives and possible practices, including
most expenses, but it is not nearly the whole story.
The prospectus establishes the rules of the game, but
it doesn't necessarily establish what the practice is.
Many funds have elastic investment objectives.
These can be wild card risks.
Under SEC rules that took effect July 1, 1993, new
prospectuses will be more informative, including, for
example, the name of the portfolio manager.
Total fund returns for the last 10 years, a
discussion of the factors and strategies that affected
the prior year's performance, and a chart illustrating
how a $10,000 investment would have fared compared to a
broad-based market index will also be included in the
new prospectus or annual report.
The new guidelines don't require funds to list
winners and losers among their investments, or how the
use of futures contracts, derivatives or forward
currency contracts affect performance. But some mutual
funds may choose to divulge such information in keeping
with the spirit of the guidelines.
One piece of information they won't have to
disclose in the prospectus is an asset class that
comprises less than 5% of the total portfolio. That's
the current rule and it isn't about to change.
While the performance of 5% of a fund's assets
generally does not have a dramatic impact on the
performance of the overall fund, its effect can be
multiplied substantially if the asset is used for
leverage. Some extraordinarily powerful residual bond
can create as much as four times the leverage of a
traditional bond.
If interest rates rise, the value of the residual
bond -- a popular derivative also known as an inverse
floater -- will drop almost four times as much as a
regular bond.
The investor may discover in the fund's Statement
of Additional Information that the fund can invest in
such a complicated product but the disclosure won't be
easy to find. this document is usually lengthier and
more turgid than the prospectus.
Another piece of information not required in a
mutual fund prospectus or in the annual report is the
cost of brokerage commissions, which could add up in
funds with a hefty turnover rate.
Given current low interest rates and low
inflation, investors have to be attuned to every cost a
fund incurs. They have to be conscious of how much it
costs to get their money managed. If a fund has 2% of
assets in brokerage costs, that may adversely affect
performance -- or it may not if the portfolio manager
is skilled at taking short term profits.
The issue of disclosure about mutual fund
activities is probably as old as the business itself.
But recently it has received more attention because of
the new SEC rules and other developments.
In mid-1993 the New York City Department of
Consumer Affairs charged the Dreyfus Corp. and the
Franklin Advisers for engaging in deceptive advertising.
Dreyfus was cited for claiming in a brochure that
its Growth and Income Fund does not invest in junk
bonds even though its prospectus states that up to 35%
of its assets may be invested in convertible debt
securities deemed to be junk bonds. This is the
portion of the fund left over after 65% is invested in
securities that resemble the name of the fund.
Franklin was cited for claiming in an ad that its
Valuemark II fund guaranteed retirement income for life
even though the fund pays an annuity issued by an
insurance company that is only as secure as the
insurance company itself.
Index Funds -- And Why You Don't Want One
Mutual fund companies now offer index mutual funds
designed to mirror the make-up and performance of a
particular stock market index. Although the Standard &
Poor's (S&P) 500 is the most popular model for index
funds, other indices are used, with over 60 index
mutual funds offered.
Index mutual funds tend to have lower management
fees than other funds for two reasons: 1) Since the
fund invests only in stocks represented in the index,
management does not need to analyze or select stocks.
2) Index funds tend to have lower turnover, resulting
in lower transaction costs and minimal capital gains
distributions to investors. Index funds are often
almost fully invested in the stock market, keeping very
low cash reserves. There is no guarantee that an index
fund's performance will mimic the performance of the
actual index.
Investing in an index mutual fund requires careful
analysis. Index funds are modeled after different
indices, and it is important to decide which is
appropriate for your investment objectives. Different
funds modeled after the same index will experience
different results and will charge different management
fees and sales charges, making it important to
carefully review the performance of a fund you are
interested in.
Pay particularly close attention to the investment
strategies of the fund. Some index funds will buy
stocks in all companies represented in the index, in
proportion to each stock's market capitalization in the
index. Other funds purchase all of the stocks in the
index but in different proportions, while others will
purchase only some of the stocks in the index. With
all these variations, the idea of buying an index fund
isn't as pure and simple as most people are led to
believe. Brokers and salesmen love these funds,
because the performance will always be exactly what
they promised -- an approximate tracking of the index.
But fundamentally there is one major thing wrong
with index funds -- it is an attempt to sell average
performance with unthinking management. You should be
looking for superior performance with intelligent
management. Yet lots of brokers will try hard to sell
you an index fund as if it was an acceptable standard
of performance. It is not even a measure of
performance -- it is merely an average price of a long
list of stocks. Don't be fooled.
You Can Have a Full Team of Managers Even for a Small
Nestegg
Many investors haven't the time, experience or
inclination to choose and supervise their investments.
Family and business might be taking every possible
moment, and many can't or won't take the time to invest
properly. This is where an investment manager can
help. Of course it will cost, but if you don't have
the time and experience to do the job, right, a
professionally managed portfolio is likely to give you
a better return than a self-managed portfolio that you
don't devote time to supervise regularly.
The Investment Monitor Service is an investment
management system that uses top institutional money
managers with proven track records. Each manager stays
within his specialty, such as blue chip stocks,
international stocks, corporate bonds, etc. The
monitoring service shifts funds between managers based
on changing market conditions. This allows for
multiple levels of management -- the managers, who are
constantly managed for performance, and the allocation
process. As many as 12 different portfolio models are
available from the Capital Preservation model to the
Global Aggressive Growth, depending upon your
investment needs and goals. Each model utilizes eight
to twelve managers, all working on your behalf.
All this might sound expensive, but it actually
costs no more than the management fee in a typical
mutual fund, while giving you much greater
diversification than being invested in just one mutual
fund. The average management fee is 1.75%, and the
minimum account size is $25,000. No opening fees, no
closing fees, no transaction costs. The service is
also available for pension plans, IRAs, and 401K
rollovers.
Don't let that management fee put you off.
Popular money magazines -- who get most of their money
from running mutual fund advertising -- have done a
good job of convincing the public that investment
management comes free because of all the ads for "no-
load" mutual funds. But all "no-load" really means is
that there is no sales charged added on to the purchase
price. There is a management fee, but they don't make
it visible, and most people don't read the fine print.
So you're not getting free management by using a mutual
fund.
For more information and a brochure, write
Investment Monitor Service, 705 Melvin Avenue, Suite
102, Annapolis MD 21401 or call (800) 545-8972.
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