Understanding Mutual Funds Investing

Mutual funds are professionally managed, which makes them preferable to managing your own investments. These funds pool money from investors, usually a very large number of investors, and then invest it in stocks, bonds, money-market instruments, or securities of some kind or other. The mutual funds manager is the one who does the trading. Proceeds or losses are usually distributed to investors annually.

Mutual funds are a wise way to go in most investment situations. One advantage is that the costs are borne by all the shareholders. This makes cost-effective diversification possible. Also, a professional fund manager will use his/her expertise and dedicated time to do the research and make management decisions. Even so, a mutual fund that invests in stocks will be subject to the same ups and downs as the stock market.

You may be able to choose from several classes of shares in any mutual fund. The major difference is in the services the shareholder enjoys and the distribution arrangements that entail a range of fees and expenses. The differences are generally presented as the different costs involved in the various classes. If the shares are sold through brokers with a front-end load, the costs will reflect that. On the other hand, if the shares that are sold directly to the public with no load, the costs will also reflect that. It’s even likely that one class will be $10-million-minimum investors, generally only financial institutions. For all of these reasons, various classes will perform differently.

Front-end load or sales charge means the commission a broker will charge at the time that the mutual fund purchases shares. However, some funds have a back-end load, which means the sales charge is deferred. In other words, the investor pays no charge up front but will pay the charge out of proceeds when the shares are sold. A level-load fund is one whose sales charge is due if the shares are sold within a year of purchase.

Bond Funds

Eighteen percent of mutual fund assets are bond funds, including term funds (fixed time before they mature). Municipal bond funds tend to have lower returns; however, the tax advantages are significant and there is lower risk with these funds. At greater risk are high-yield bond funds. These are corporate bonds and will include high-yield or junk bonds.

Money-Market Funds

Twenty-six percent of mutual funds are in money markets. These carry the least risk, but the rate of return is lower. Money-market shares can be redeemed at any time; they are different from CDs in this.

Funds of Funds

It’s not uncommon for a mutual fund to invest in other mutual funds. In other words, these are funds made up of underlying funds. Actually, the investor could invest in these underlying funds if he so chose. The fees in these funds of funds are lower and the fees charged by the underlying funds are only disclosed in the fund’s annual report or prospectus. Both fund expenses and the underlying fund expenses impact the return, so this is important information.

A variation is a fund of funds is one that invests in another fund with the same manager, called an affiliated fund. The costs are typically lower when this is the case.

Hedge Funds

These are pooled mutual funds that have little regulation by the SEC. The adviser doesn’t have to follow or avoid any investment strategies. Also, no requirements are made regarding which investments may be purchased. These funds usually charge a management fee of 1% or more. Also, a performance fee of 20% of the fund’s profits is usually charged. Some hedge funds declare a period during which shares cannot be cashed in.

Ask Joseph Leonard and Coastal Investment Advisors for additional personal finance advice or learn money management tips on financial management by downloading this free financial management guide.

How to: Research an Online Stock Purchase

There are many ways to go about financial investing. A number of well-known companies sell stock directly to individuals. If you’re making a direct stock purchase yourself, you’ll find that most companies will not charge you a commission or if they do, the commission charges will be much lower than if you’re buying through a broker. If you’re interested in financial investing in only a small number of shares and want to keep your costs as low as possible, this is a good way to go.

There are many things to know about a particular stock. Remember that in financial investing, when you buy a share, you are buying a share of ownership in this company.

Types of Stocks to Purchase

Blue Chip Stocks

These are the oldest companies that have been continuously profitable. They usually pay a dividend. Many of the thirty Dow stocks are blue chips. For financial investing, many of the lowest-risk stocks are in this group.

Growth Stocks 

These are expected to have the greatest yields for financial investing. They typically don’t pay dividends because they tend to reinvest their earnings. When they’re growing, they tend to be pricey. However, if they’ve had a setback, the price can go down—a lot. If you choose to buy these, be prepared for the roller-coaster.

No-Load Stocks

If you go to a company’s website, you can usually find out if it participates in no-load stocks. These are inexpensive for purposes financial investing; in fact, sometimes you can invest for no cost at all. On the company’s website you can learn how to invest directly.

Speculative Stocks

These are risky for financial investing. The likelihood that you might lose a lot of money is very high here and the likelihood that you’ll make a lot of money is low. Some of these are priced under $5 per share.

What to Look for When Evaluating Stock for Financial Investing

• Price-to-earnings ratio
• Earnings-per-share increase over the past year
• Earnings of the company
• Yearly increase in revenues and profits
• History of stock splits
• Dividends
• Debts
• Relative strength
• Business model
• Management
• Plans for the future
• News—past and present
• Price of share
• Price fluctuations
• Price over time
• Projections for five years (estimates, of course)
• Ranking in industry
• Number of broker recommendations

You can find this information in the following places:

• MsFinancialSavvy’s interactive charts, bookstore, and news.
• Online web portals; i.e., Yahoo, Google
• Hoover’s Online
• http://www.sec.gov/ (Edgar Online)
• Website for the company
• Annual Report for the company
• Financial newspapers

For purposes of financial investing, you will want to make a chart in order to keep track of the information you collect. It’s the diligent researcher who is most likely to make profitable investments in stocks. You will need to pay either short-term capital gains taxes or long-term capital gains taxes. However, the experts say your focus should be on profits and earnings, not taxes.

Ask Joseph Leonard and Coastal Investment Advisors for additional personal finance advice or learn money management tips on financial management by downloading this free financial management guide.

How To: Financial Management Basics

Financial management covers a wide range of money topics such as budgeting, expenses, debt, saving, and retirement planning. Seeing how they go hand-in-hand can help you lay a solid financial foundation for yourself and your family.

Budget

Unfortunately, many families skip right over this step in the financial management process, and that’s a big mistake. We are faced most days with many decisions about what to do with the limited money we have in hand, and it’s difficult to remember everything. It’s better to create a budget and commit it to paper to avoid overspending, debt problems, or spending on things you don’t need.

With a budget, you can see clearly how much money you have, where it goes, and whether you have any left over. Besides, once you have this picture, you can begin to think about ways to optimize spending and cut out waste. Financial management at this level is how you get ahead, no matter what your income.

Getting out of Debt

When you begin to be realistic in your financial management, you’ll probably find that you have debt that will limit how much control you can bring to the process. Using credit wisely isn’t a bad thing, but you need to be sure that the debt you have is the good kind and not the bad kind.

The mortgage or debt that you take on to buy a home amounts to a lot of debt. However, this is usually good debt. In the first place, you must have a place to live for yourself and your family, so you either must rent or buy. If you buy, you can usually get a low interest rate, and you will be investing in an asset that will become more valuable in time in addition to giving your family the security of owning their own home.

However, if you go to the mall and have a shopping spree using a credit card with 22% interest and don’t pay it off right away—this is bad debt. Once your financial management plan kicks in, you will want to avoid this kind of unnecessary spending and the burden it puts on your ability to get ahead.

Pay more than the minimum each month. This is the first step to getting out of debt. The second one is to lower your interest rate. Talk to your credit card company first and see if you can negotiate interest. If not, you might want to look at other ways to lower the rate such as getting a bank loan and paying off all credit cards.

Saving for Retirement

With fewer companies offering pension plans and the uncertainty of Social Security, it’s important for you to be realistic about planning for retirement as a part of your financial management plan. Many feel that they don’t have enough left over to put aside any money for retirement.

Retirement savings as a part of your financial management plan is not an afterthought. It’s a priority. The IRS offers special tax-advantaged accounts such as employer 401(K) plans. Also, individual retirement accounts and special retirement accounts have been set up by IRA for the self-employed. Included in the benefits that come with these are tax deductions, tax credits, and tax-free earnings on retirement savings.

Even if you are just starting a family and just beginning to earn your own living, don’t fail to devote time to financial management. Or if you’re half-way through your earning years or even later, it’s not too late to do this. Having a financial management plan will pay off in ways you may not have dreamed.

Ask Joseph Leonard and Coastal Investment Advisors for additional personal finance advice or learn money management tips on financial management by downloading this free financial management guide.