Be Cautious When Studying Mutual Fund Ratings

Wherever you look, you will find various rating systems on mutual funds, each of which uses a different approach. All of them are designed to weed through the thousands of funds to get to the best ones. But is there really such a thing? Does a high rating really mean a fund will do better in the future? Many people seem to think so. A recent study showed that Morningstar, North America's most recognized rating system for funds, has a tremendous influence on fund sales. If Morningstar gives a five-star rating, those funds typically enjoy increased sales as a result.

While ranking providers are careful to warn investors that their ratings don't foretell the future, the star system is, unfortunately, used by some investors as if they were reading Consumer Reports to purchase a new drill. Supporters of the ranking approach argue that there's no subjective component to the star rating. It isn't determined by an analyst's review, and can't change simply because the service dislikes the fund's manager or its investment strategy. And that's good.

Performance will vary. Fund performance often falls off and risk levels rise during the subsequent three years after a fund is given an initial five-star Morningstar rating, suggests another recent study by Matthew Morey, a professor at Pace University. One reason for this is that after receiving a five-star rating the size of the fund grows dramatically, which then makes the fund unwieldy to manage, he suggests. Since Morey's study was completed, Morningstar also has changed the way it doles out top rankings to make them more precise. One of the biggest problems with all rating systems is that they are not necessarily predictive in nature. This means they're not really set up to tell you whether certain funds will necessarily do better in the future. For the most part, the ratings indicate how much you might have made and how much aggravation you faced in the process.

Combining risk and return. For example, one five-star fund might post moderate return scores, but incredibly low risk scores. Another five-star fund might have much higher-risk scores, but its return score could be strong enough to help it still rank in the top 10% of the pack.

In some cases, in fact, it's not even the same fund to begin with. Remember, after a management change, the rating stays with the fund, not the portfolio manager. Therefore, a fund's rating might be based almost entirely on the track record of a manager who is no longer with the fund.

Understand how the ratings were developed. Too many people put emphasis on the results without knowing how the results were achieved. If you are going to use ratings, take the time to understand how they were developed and what they really mean. It is not the destination but the journey that counts.

Past performance is no guarantee of the future. You have probably heard this disclaimer a thousand times before, but it is really important to understand. Most rating systems have little to no predictive element in them. It's natural to think that the best performer of the past will be the best performer in the future. Unfortunately, it's not that simple. Just think about it; if it were that easy, investors would just continue to buy last year's winners knowing that they will be this year's winners. And that seldom works.

Ratings are a very important element in trying to distinguish between good and bad funds. Good research, however, goes far beyond just looking for five stars or an A+. When evaluating funds, look at the quantitative, measurable characteristics of a fund: returns up against the benchmark, costs, risks, taxes and manager tenure. Use rating systems as part of your research, but remember: just because the analysts give them top marks, it does not mean they will be the best investment in the future, and doesn’t it mean that they'll be the best investment for you in particular. Take the time to understand how the ratings were achieved. This will be the first step to educating yourself about funds.

10 Golden Rules for Stock Trading Success

Your stock trading rules are your money. When you follow your rules you make money. However if you break your own stock trading rules the most likely outcome is that you will lose money.

Once you have a reliable set of stock trading rules it is important to keep them in mind. Here is one discipline that can reap rewards. Read these rules before your day starts and also read the rules when your day ends.

Rule 1: I must follow my rules.

Naturally if you develop a set of rules they are to be followed. It is human nature to want to vary or break rules and it takes discipline to continue to act in accordance with the established rules.

Rule 2: I will never risk more than 3% of my total portfolio on any one stock trade.

There are many old traders. There are many bold traders. But there are never any old bold traders. Protecting your capital base is fundamental to successful stock market trading over time.

Rule 3: I will cut my losses at 5% to 15% when I am wrong without question.

Some traders have an even lower tolerance for loss. The key point here is to have set points (stop loss) within the limits of your tolerance for loss. Stay informed about the performance of you stock and stick to your stop loss point.

Rule 4: Never set price targets.

This is a style that will allow me to get the most out of rising stocks. Simply let the profits run. Realistically, I can never pick tops. Never feel a stock has risen too high too quickly. Be willing to give back a good percentage of profits in the hope of much bigger profits.

The big money is made from trading the really BIG moves that I can occasionally catch.

Rule 5: Master one style.

Keep learning and getting better at this one method of trading. Never jump from one trading style to another. Master one style rather than become average at implementing several styles.

Rule 6: Let price and volume be my guides.

Never listen to any opinion about the stock market or individual stocks you are considering trading or are already trading. Everything is reflected in the price and volume.

Rule 7: Take all valid signals that show up.

Don't make excuses. If an entry signal shows up you have no excuse not to take it.

Rule 8: Never trade from intra-day data. There is always stock price variation within the course of any trading day. Relying on this data for momentum trading can lead to some wrong decisions.

Rule 9: Take time out.

Successful stock trading isn't solely about trading. It's also about emotional strength and physical fitness. Reduce the stress every day by taking time off the computer and working on other areas. A stressful trader will not make it in the long term.

Rule 10: Be an above average trader.

In order to succeed in the stock market you don't need to do anything exceptional. You simply need to not do what the average trader does. The average trader is inconsistent and undisciplined. Ask yourself every day, "Did I follow my method today?" If your answer is no then you are in trouble and it's time to recommit yourself to your stock trading rules.

Stocks Or Mutual Funds?

If you happen to have some money left over at the end of all the bill payments and you have no need for anymore toys, or even if you are beginning a prudent and fiscally responsible gamble on some wealth that incorporates investment opportunities, you may find yourself wondering whether investing in stocks or purchasing mutual funds will offer the best returns. You might also consider this question when considering how to set up a retirement fund.

In order to help make the decision, it is important to understand what stocks and mutual funds are.

Stocks: Most people believe they have a basic understanding of what stocks are, simply because of their exposure to the term in every day usages. Stocks are individual bits of companies that are available to be purchased by the public in open trading on the stock exchange. Stocks are often sold in bundles, and thus to purchase a stock in a specific company often entails some kind of minimum purchase. Stockholders have a vested interest in the company’s well-being, as the price of their stocks are directly related to a company’s performance. Stocks are divided according to the kind of business they represent, which is known as a sector.

Mutual Funds: Mutual funds are collective investments that pools the money from a lot of investors and puts the money in stocks, bonds, and other investments. Mutual funds are usually managed by a certified professional, as opposed to the individual management of stocks. In essence, mutual funds incorporate many different types of stocks.

The question of whether or not to invest in stocks or mutual funds will primarily come down to the personal expertise and wealth of the individual. Many people will be tempted by the “game” aspect of buying stock, as well as the chance to invest singularly in a company that is well-known or can be easily researched. The fact is, however, that by the time stocks become available on the market they are generally already highly priced, and investing in individual stocks is a highly risky maneuver as your entire process hangs on the well-being of just one company. Even wealthy investors diversify their portfolios by investing in several different types of stock, and this can simply be unaffordable for the average person.

The better bet for the beginning investor is to purchase mutual funds. Mutual funds will pool the costs of many different stocks, lessening the risk of losing your money and raising the chances of gain. Mutual funds may not provide quite the excitement of investing in a lucky stock, but they are good investments for a long-term financial opportunity. In addition, mutual funds are managed by professionals that are well acquainted with the pitfalls and opportunities of the investment sector, which will cut down on both risk and the time it would take to pick individual stocks through research and appointments. Mutual funds will also distribute the risks among several investors, and it is all managed by someone who likely has contacts within the financial world.

For the individual with some extra money, who does not have the time or the expertise to properly “play” the stock market, mutual funds will prove the better option.

Mutual Funds - how these profit exploding money makers actually work

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.

What exactly is a mutual fund?

Mutual funds are sold in shares to the public, allowing them to own different percentages of the fund depending on the amount they invest.

Pay more = own more. Own more = get more $$ back again (theoretically)

Simple.

Stocks, bonds, money market securities and the like are purchased through the assets of these mutual funds in the financial markets. Shareholders indirectly own the assets held in the mutual fund, but the fund is guided by the investment company that finds the best way to earn the biggest return. (Indirectly owning the assets through these funds allows them to avoid the big tax hit.)


How does a Mutual Fund work?

Usually, mutual funds are also known as open-ended investment companies. This means that they constantly issue new shares and redeem existing shares, but not all mutual funds are open however. Some mutual funds are ‘locked’ where they no longer will take on new investors.

The fund’s Net Asset Value is the key concept to understanding how a mutual fund operates. By this value you can determine the value of a share of the fund at any time. The market value of the fund’s assets less any liabilities, divided by the number of shares outstanding is the formula to understand Net Asset Value.

If you work through that it will show you exactly how much each share in the fund is worth when you are looking to invest in them. By comparing this number over time you can see the returns earned in a percentage. This is generally all done for you on a funds website or on any of the mutual fund sites that feature stats.

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.

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!!

Market timing with your mutual funds

When investing in bonds, stocks, or mutual funds, investors have the opportunity to increase their rate of return by timing the market - investing when stock markets go up and selling before they decline. A good investor can either time the market prudently, select a good investment, or employ a combination of both to increase his or her rate of return. However, any attempt to increase your rate of return by timing the market entails higher risk. Investors who actively try to time the market should realize that sometimes the unexpected does happen and they could lose money or forgo an excellent return.

Timing the market is difficult. To be successful, you have to make two investment decisions correctly: one to sell and one to buy. If you get either wrong in the short term you are out of luck. In addition, investors should realize that:

1. Stock markets go up more often than they go down.

2. When stock markets decline they tend to decline very quickly. That is, short-term losses are more severe than short-term gains.

3. The bulk of the gains posted by the stock market are posted in a very short time. In short, if you miss one or two good days in the stock market you will forgo the bulk of the gains.

Not many investors are good timers. "The Portable Pension Fiduciary," by John H. Ilkiw, noted the results of a comprehensive study of institutional investors, such as mutual fund and pension fund managers. The study concluded that the median money manager added some value by selecting investments that outperform the market. The best money managers added more than 2 percent per year due to stock selection. However the median money manager lost value by timing the market. Thus, investors should realize that marketing timing can add value but that there are better strategies that increase returns over the long term, incur less risk, and have a higher probability of success.

One of the reasons why it is so difficult to time correctly is due to the difficulty of removing emotion from your investment decision. Investors who invest on emotion tend to overreact: they invest when prices are high and sell when prices are low. Professional money managers, who can remove emotion from their investment decisions, can add value by timing their investments correctly, but the bulk of their excess rates of return are still generated through security selection and other investment strategies. Investors who want to increase their rate of return through market timing should consider a good Tactical Asset Allocation fund. These funds aim to add value by changing the investment mix between cash, bonds, and stocks following strict protocols and models, rather than emotion-based market timing.

How To Pick A Profitable Mutual Fund

We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all mutual funds hire professional analysts that are market experts and devout many hours of study to the various stocks. Unless you want to devout a large portion of your free time to the study of the financial reports, you probably won’t have as much information to make a decision as a mutual fund manager.

Then there is the well documented advantage of diversification. Risk is reduced by holding several non correlated investments. Put simply, some go up, some go down and combined, the return levels off the fluctuations, or risk.

Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.

Given the above advantages, it’s no wonder that mutual funds have become a very popular form of investing. Now there are thousands of mutual funds to choose from, so how does one make a selection? Here are a few tips:

1. Do not be seduced to jump on the recently performing best fund. It may seem like the safe and rational thing to do, but like individual stocks, you want to buy low and sell high, not buy high and pray for more growth.

2. Even good funds may not be able to overcome the force of the overall market. You should be looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Read the prospectus closely to understand what these are.

3. Limit the number of funds that you own. Unless you are trying to simply achieve the same returns as the broad market, diversifying into many mutual funds will not reduce your risk or increase your return by much.

4. Funds that become too popular and too big tend to slip in performance. There are several reasons for this.

One final point to keep in mind is that the type of fund will totally depend on your investment objectives. There are certain funds that are designed for your objectives be they retirement, income, growth, funding the kids college, etc.

How does a mutual fund work?

What?

Mutual fund shares can be purchased from the company itself or a broker. An example secondary market investors also, like the New York Stock Exchange. Per share net asset value of the funds or NAV is the price that you pay for buying a mutual fund share. It also includes the shareholder fee that is imposed by the fund, at time you make the buy. Investment advisers act as separate entities and are responsible for managing the investment portfolio of the mutual funds. Investing in mutual funds tends to lower the risk factor because they are the result of diverse investments.

The best feature of mutual funds is that these shares are redeemable. You, as an investor, can sell your shares back to the broker. In order to accommodate new investors, mutual fund companies generally create new shares and sell them. They keep selling their shares continuously till they become large.

How do I manage my investment?

Since someone else manages your investments, you need not worry about keeping constant tabs on the investment(Some bad brokers may rip you off, so watch your back) though a periodical check enhances your personal book of accounts. Managing funds is the full time job of the fund manager and he is responsible for the performance and health of the investment.

The rate of returns in mutual funds is based on the increase or decrease of the value, during a specific period. Returns of a fund indicate the track record. It is important to remember that the past performance cannot guarantee future results.

As in the case of any investment or business, mutual funds also have risks associated with the returns. It is essential to set your financial goals and requirements, before investing in a mutual fund.

What is a Mutual funds?

A company dealing in mutual funds invests the money of several investors in bonds, stocks, securities, assets and several other short-term money-market plans. The combined holdings owned by the mutual fund are known as its portfolio.

When you invest in a mutual fund you become a shareholder of the company. Each share in a mutual fund company is the representation of he investor's proportionate ownership of the fund holdings and the income generated. You earn dividends when the mutual fund company earns a profit, however, your shares will decrease in value if it faces a loss. A professional investment manager does the buying and selling of securities for the growth of the fund.

How to Avoid a bad Mutual Fund

We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all mutual funds hire professional analysts that are market experts and devout many hours of study to the various stocks. Unless you want to devout a large portion of your free time to the study of the financial reports, you probably won't have as much information to make a decision as a mutual fund manager.

Then there is the well documented advantage of diversification. Risk is reduced by holding several non correlated investments. Put simply, some go up, some go down and combined, the return levels off the fluctuations, or risk.

Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.

Given the above advantages, it's no wonder that mutual funds have become a very popular form of investing. Now there are thousands of mutual funds to choose from, so how does one make a selection?

Here are a few tips:

1. Do not be seduced to jump on the recently performing best fund. It may seem like the safe and rational thing to do, but like individual stocks, you want to buy low and sell high, not buy high and pray for more growth.
2. Even good funds may not be able to overcome the force of the overall market. You should be looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Read the prospectus closely to understand what these are.
3. Limit the number of funds that you own. Unless you are trying to simply achieve the same returns as the broad market, diversifying into many mutual funds will not reduce your risk or increase your return by much.
4. Funds that become too popular and too big tend to slip in performance. There are several reasons for this.

One final point to keep in mind is that the type of fund will totally depend on your investment objectives. There are certain funds that are designed for your objectives be they retirement, income, growth, funding the kids college, etc.

Going global through mutual funds

There are more than 13500 different publicly traded companies in the world today, and there are over 700 more companies expected to go public within a year. In addition, every major developed country offers investors various bonds to invest in. All of this makes for a lot of different investments and plenty of choice. Investors can take advantage of this choice through a good global balanced fund that invests in bonds and stocks or a global equity fund that invests in stocks all around the world.

A global equity fund invests in stock markets around the world. These funds will have a portion of their investments invested in North America. Europe, and Asia. Some of these funds will own hundreds of securities in order to participate in the growth prospects of many firms while diversifying the risk associated with investing in different companies. A good global equity fund will be a foundation for a well-diversified mutual fund portfolio for almost any investor. Investors could consider including the AGF International Value Fund, the BPI Global Equity Fund, or the Fidelity International Portfolio Fund in their portfolios.

A global balanced fund is a fund that invests in both stock and bond markets around the world. These funds will also always have a portion of their investments invested in stock and bond markets located in North America, Europe, and Asia. They are more conservative than global equity funds because they invest in a combination of stocks and bonds, which affect the fund's performance. Over the long term these funds will provide a lower rate of return for investors but they will also exhibit a lot less risk than a global equity fund. They exhibit less risk because bonds are less volatile than stocks; they do not decline in value to the same magnitude or at the same time as global equity funds. A conservative investor should find a good global balanced fund that will serve as a good foundation for a diversified portfolio.

Types of Mutual Fund

Stock Funds

1. Stock funds are the most common type of mutual fund, and they invest exclusively in common and preferred stocks. They are the most volatile type of mutual fund. This category includes many different types of funds, which are designed for investors with various objectives. Typical stock funds include growth funds that seek capital appreciation through companies that are likely to experience significant growth, value funds that look for companies whose stock may be undervalued, and balanced funds that seek a combination of the two. Other popular types include sector funds that invest in particular industries, and index funds that seek to mimic the performance of a particular stock index like the Dow Jones Industrial Average or the Standard & Poor's 500, by investing in all the stocks in one of those indexes.

Bond Funds

2. Bond funds are suitable for investors who are looking for long-term income. Bond funds tend to be significantly less volatile than stock funds, but their price still fluctuates depending on the movement of interest rates. Bond funds may invest in short-, medium- or long-term bonds and in bonds of varying degrees of safety. In general, funds that invest in low-rated bonds (such as "junk bonds") pay the highest returns in the short term, but in the longer term they carry the highest risk, as these bonds carry a higher probability of default. Bond funds may experience capital appreciation when interest rates are falling, but typically they are not held for this purpose.

Money Market Funds

3. Money market funds are funds that invest exclusively in short-term money market securities like treasury bills, certificates of deposit and commercial paper. Their goal is to provide interest income to the shareholder, not capital appreciation. Money market funds attempt to keep their net asset value fixed at $1.00 per share and are required by law to invest in low-risk securities. Many money market funds have check writing privileges, allowing the shareholder to use them essentially as interest-bearing checking accounts. Money market funds are a good place to park excess short-term cash but are not suitable for those seeking significant growth in the value of their investment.

Load vs. No-Load

4. Some stock and bond funds have a sales charge (or load) that the investor must pay to buy shares in the fund. This charge is deducted from both the initial and any subsequent purchases that the investor makes in the fund and reduces the value of her investment. Typical load charges range from 1 percent to 3 percent of the amount invested. Load funds tend to be specialized, such as sector funds, but also may be funds run by a successful or popular fund manager. By contrast, no-load funds have no sales charge and the full amount invested is used to purchase shares.

Mutual Fund "Families"

5. Many mutual funds are managed by so-called families, which market several different funds under one corporate umbrella. Examples of fund families include Fidelity, Vanguard, Oppenheimer, and T. Rowe Price. Investing in a fund that is part of a family has several advantages. Fund families will supply the investor with information about all of their funds, and typically only one application is required to invest in the entire family. Also, most fund families allow the investor to easily switch his investment between any of the funds in the family. Most fund families also offer money market funds as a convenient place to park cash between investments in their various funds.

Ways to earn good profit out of mutual fund; It is more of commonsense

Mutual funds are the vehicle that help normal individuals to invest together in equity and debt market without taking too much of risk. The mutual funds are created with predetermined investment objectives, to suit different kind of investors. More over mutual funds are made in such a way that they achieve a variety of risk/reward objectives. However, the right way to benefit from mutual funds is to balance the risk as well as the potential to earn. That’s the reason, identifying the right level of risk tolerance, choosing the right schemes and allocation to the right asset class remains the most important factors in ensuring success from a mutual fund portfolio.

First point is the right funds in your Portfolio
When we select funds we need to make sure that we need to have right mix of right funds. For that we need to keep in mind your profile and the kind of fund that matches your profile. If you are a conservative investor, the composition of your portfolio would be different from someone who may have different risk profile and time horizon such as aggressive.
Moreover If you have created a portfolio of different equity funds, and wish to invest more in equity over a period of time. Make sure that you keep an eye over the exposure to all the sectors in which the funds have invested in. we need to look over the fund houses and fund managers styles, strategies, and philosophies. There is a difference between different fund manager’s style and strategies to a good level. The fund houses are very particular to their fund management philosophies and management style. The fund management style is further reflected in the performance of the funds they have.
As far as fund management style is considered we need to look at the performance of their funds over a period of time. To perform consistently over a period of time is not an easy task. Only few funds have been able to perform at a consistent rate. These fund houses and fund managers do follow certain styles which further become the core of the fund philosophies

As a Tax payer – Make use of its hidden potential
Equity Linked Savings Schemes (ELSS) are the best instrument that provides an investment option that provides you an affective and safe way to investing in equity market and save taxes. If we take this particular fund as a product it is quiet sure to give good returns over a period of time. Over a period of time equities have the potential to provide better returns compared to other instruments. These ELSS funds being equity oriented provide returns which can be really appreciable. ELSS have the potential to provide better returns than most of the options under Section 80C.
One of the important features is the tax efficiency in terms of returns earned through them. It is important considering that ELSS also aims to distribute income by way of dividend periodically depending on the distributable surplus. Moreover an SIP in any ELSS scheme will help you to save more by investing more, as you save more of taxes. More over the long-term capital gains can be very attractive and is again tax free.


Re-balance your portfolio if required
Ensure that the exposure of your equity portfolio to different market segments i.e. large cap, mid cap and small cap is in the right proportion. If not, you need to realign it according to your risk profile, time period and investment objective. You might need to scuffle the portfolio a bit in order to get it in right shape. An existing investor, need to make sure that the portfolio does not include too much of funds without any proper planning and allocation. The first step in towards rebalancing your portfolio is checking out which funds are not performing up to the mark. For this, the right way would be to compare the performance of your schemes with the benchmark and other funds in the same group. In the case of some non-performing schemes we need to remove them out through the redemption process in phases. We need to take notice towards the exposure to different sectors in the portfolio . While rebalancing the portfolio, the focus should be on those schemes in the portfolio that have been performing consistently and have a good quality portfolio.

Retirement Income Planning: Mutual Funds

When willing to invest in mutual funds for Supplemental Retirement Income Planning, you have millions of alternatives. It is always important to analyze the plan, its limitations and the risks you will be running, and thus, it would be easier for you to narrow your alternatives. For this matter, it could be helpful to get in contact with a Retirement Income Planning financial professional.

Mutual funds are classified in three main categories that differ in regards to their risks, features and rewards. They are money market funds, bond funds, which also receive the name of “fixed income” and finally, stock funds, which are also called “equity funds”. Let’s take a deeper look at each one of them.

Money Market Funds can only invest in just some high-quality, short-term investment that be issued by the U.S. government, U.S. corporations and local governments. These funds attempt to keep the value of a share in a fund, called the net asset value (NAV) at a stable $1.00 a share. The returns for these funds have always been lower than the other two kinds of funds. Because of this, money market funds investors have to be aware about the “inflation risk”. Although Bond Funds are a bit risky than money market ones, most of the time, risks can be controlled with greater certainty than stocks. In addition, due to the fact that there are many types of Bund Funds, their risks and rewards vary greatly. These risks may encompass credit risk, which refers to the possibility that issuers whose bonds are owned by the fund do not pay their debts; interest rate risk and prepayment risk, which is associated to the chance that a bond be “retired” early. Finally, there are differences between one stock fund and another. For instance, Growth Funds are focused on stocks that provide large capital gains, Income Funds invest in stocks that pay regular dividends, and Sector Funds are specialized in particular industry segments. In general, they present a medium-to-high level of risk.

Thus, people who are planning to invest in a fund that combines growth and income, which are definitely key factors, may find mutual funds an interesting balanced alternative choice for Supplemental Retirement Income Planning.

How to select a mutual fund for me

One of the most common ways of selecting a mutual fund is to invest with the crowd in today's hot funds. Unfortunately, jumping from one winning fund to another is a recipe for disaster. The mutual funds that the crowd follows typically have had a hot recent performance and tend to gather all the new mutual fund sales.

Investors as a whole are primarily allocating their new investments to a small number of mutual funds and to a smaller number of mutual fund companies. Investors have invested over $400 billion in the 2843 different mutual funds, but one-third of those assets are invested in only 50 of those funds and one-half of those assets are invested in the largest 100 funds.

There are benefits to following the market leaders. Larger mutual fund companies and larger funds have the ability to reduce costs and attract the best professional money managers. However, the biggest limitation is that today's better-selling mutual fund may not be tomorrow's winner. This is true for any mutual fund but it seems to plague the best seller, and the one that garners the most attention, the most often.

So buying the equity fund that was yesterday's best-seller isn't a strategy that produces excellent returns. You do not have to go fully in the opposite direction and ignore these hot funds, but you should understand their limitations and strengths. They became best-selling funds because they have merit, but you have to access that merit within your own well-diversified portfolio, and not the crowd's current investment trend.

Why You Should Buy No-Load Funds!

Load is defined as the fee or the commission that an investor pays to a mutual fund at the time of purchasing or redeeming the shares of the mutual fund.

If the commission is charged when the investor buys the shares, it is known as a front-end load. On the other hand if the commission is charged when the investors redeems his shares, it is known as a back-end load.

Certain funds apply back-end loads only if the shares are redeemed within a specific time period after being bought.

The argument for applying loads on mutual fund transactions is that these loads will discourage investors from trading frequently in mutual funds. If the investors quickly move in and out of mutual funds, the funds have to maintain a high cash position to meet these redemptions, which in turn decreases the returns of the funds.
Also frequent trading means the expenses of the mutual funds go up.

There are various arguments against load funds:

-The fees that the mutual funds collect as loads are passed on to the fund brokers. The loads do not provide any incentive for the fund manager for better performance of the funds. In other words, a load fund has no reason why its managers should perform better than those of no-load funds.

-In the last few decades, no difference has been seen in the returns of load and no-load funds (if the loads are not considered.) When the loads are considered, the investors of load funds have actually gained less than the investors of no-load funds.

-When a sales person knows that he is going to get a commission from a load fund, he tends to push the load fund more - even when the load funds are performing poorly as compared to no-load funds.

-Loads are understated by mutual funds. If an investor invests $1000 in a fund with 5% front-end load, the actual investment is only $950. Thus his actual load is $50 in $950 investment - a 5.26% load.

If an investor is already invested in a load fund, it doesn’t make sense to exit now. The load has already been paid for. The hold or sell decision should now only be based on what the investor thinks about the future performance of the fund. In a few funds, the exit load depends on the period for which the fund was held. Check the details of the fund prospectus for more information.

In most cases it is better to avoid load funds; however, investors should keep one thing in mind. Sometimes load funds can be a better choice than no-load funds. For example, an investor has a choice of two classes in a fund - class A and class B. Class A has 3% front-end load and Class B has no load. The investor however misses the fine print, which states that Class B has 1% 12b-1 annual fees.

If the fund will make 10% gains each year, its return in Class A (starting with actual amount invested $970) will be

($970) X (1.10) X (1.10) X (1.10) X (1.10) X (1.10) = $1562

For Class B, the returns will be

($1000) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) = $1532.

Thus the above example is an exception, where in the long run, the load fund will perform better than the no-load fund (with 12b-1 fees).

The fact is that a no-load fund cannot be considered a true no-load fund, if it charges fees from it's investors in the form of 12b-1 and other fees.