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The goal of mutual fund help centers is to give you basic educational material on mutual funds. Mutual fund help centers will give you enough information for you to ask your financial professional the right questions to achieve your ultimate goal: FINANCIAL INDEPENDENCE IN YOUR RETIREMENT AND THE ABILITY TO TRANSFER YOUR ASSETS TO YOUR BENEFICIARIES WITH THE LEAST AMOUNT OF TAX BURDEN!
Basics of Mutual Funds:
Mutual funds are a simple way to invest in securities. You tell your financial advisor what you are looking for: stocks; bonds; an aggressive or conservative investment strategy; an income or an appreciation approach; then your advisor finds the mutual fund which fits your needs. Most stock funds with front end loads have sales charges between 4% and 6%. Bond funds have sales charges that range between 3% and 5%. Sales charges are usually reduced the more you invest. This is known as “break points” or, in simple terms, a volume discount.
In the early 1980’s brokerage firms and mutual fund companies realized people did not like to pay an upfront sales charge, so they invented a new type of sales charge called “backend sales charge”, or “redemption fees”. This means that you may pay a sales charge when you sell your shares back to the fund.
My opinion on mutual fund expenses is that loads and annual fees are not as important as the funds performance in both up and down markets. A mutual fund that does only 2% a year better then the S&P 500 will have 65% more value then an S&P 500 index fund in only twenty-five years. As an example if the S&P 500 index fund grew to $610,000.00 in twenty five years a mutual fund that grows only 2% more every year would have over one million dollars in the same twenty five year period. This is known as the positive effect of “compounding”. If you do your own research online you will find the names of mutual funds that have beaten the S&P 500 over the long term.
IMPORTANT! - What is very important is that unless you know, and understand, how to select a no load mutual fund which meets your risk tolerance, investment objective, and suitability, you might be emotionally induced by the wrong factors to purchase a specific mutual fund. Unfortunately, many average and unsophisticated investors purchase a mutual fund based on its latest twelve-month performance without considering those other factors. Since we are talking about large amounts of money that could affect your financial future, unless you are willing to put in the time, effort, research, and monitoring of your money, the services of a qualified financial professional may be the better value.
There are two types of mutual funds: open-end and closed-end. Open-end mutual funds consist of a portfolio of securities that trade at net asset value, or N.A.V. Net asset value is the total value of the securities in the fund at the end of each trading day divided by the number of shares outstanding of the fund. That is how you get the cost per share of an open-end mutual fund. Even if you buy an open-end mutual fund in the morning, your advisor cannot tell you what you paid for the fund until the next day. Open-end also means the number of shares that can be purchased is unlimited. A closed-end mutual fund is a fund which has a limited number of shares. An open-end fund and a closed-end fund are similar in that they both have securities in their portfolio, they both charge shareholders for expenses, and they both have N.A.V.’s; however, unlike shares of an open-end fund, shares of a closed-end fund are traded freely in the open market. This means that shares could be bought and sold either below (a discount) or above (a premium) the fund’s net asset value. Since the number of shares of a closed end fund is limited, the price at which you either buy or sell your shares in the open market will depend on the demand for the shares. Clearly, then, there is an additional risk in a closed-end fund. Not only is there fluctuation in net asset value, but also in the demand for the shares, and because of this, there is also an opportunity. If you purchase shares of a closed-end fund whose shares are selling at a significant discount to the net asset value, it is possible in a rising market that not only will the net asset value increase, but the demand for the shares will also increase. This will narrow the discount and possibly put the share price at a premium to net asset value. You can find specific information on closed-end funds on the internet, in the WALL STREET JOURNAL, and BARRONS. They will have the share price, net asset value, and percentage of discount or premium so you can easily be fully informed.
Why invest in mutual funds?
When I ask clients why they invest in mutual funds most of them laugh and say "like everyone else I want to make money". The answer is not as simple as ' I want to make money'. When I ask them to explain why they want their mutual funds to make money their answers differ from person to person. The one answer that was universal was they want to have enough money when they get older. Everyone realized that unless they are financially independent they will not be able to retire.
Most people do not understand that investing money is the same as people working. Here is what I mean. The definition of working is "an occupation in which you get paid a salary or commission". Well, money invested in mutual funds also gets paid. Depending on the type of mutual fund you invest in your money gets paid in three ways: interest income, dividends, or appreciation in value.
Financial independence means having your investments pay you as much as your occupation pays you. Only then will you be financially secure to retire. The problem is most people have no idea what they need to do today to have financial independence in twenty, thirty, or forty years. It amazes me when I speak to people and they tell me they planned a vacation and they know exactly how much money they will need. Yet when it comes to their retirement they have no idea how to figure it out. I tell them that the same way they have a "Game Plan" for their vacation they need a "Game Plan" for their retirement. A game plan for your retirement is called a "Financial Analysis". Qualified financial professionals have the expertise and software to create a customize financial analysis. Based on the information you give them today they can project what you will need to retire. Remember, this is only a projection. The one thing that is guaranteed is that things change. I suggest you review your financial analysis with your financial professional every year. If your financial situation changes make sure it is updated. This is especially true if the bulk of your money is in an employer sponsored retirement plan. Make sure you contact the plan administrator annually. He will direct you to the financial professional who is there to educate you on your investments.
As an arbitrator and mediator for FINRA and a consumer advocate on investor education for the past fifteen years I believe mutual funds are complex investment products that should be explained, in detail, by a financial professional. Depending on your assets and you investment objective, mutual funds should be seriously considered in your financial planning for retirement.
If you have any questions or concerns about your mutual fund or financial advisor, contact the following agencies:
At this time I strongly suggest setting up an appointment with a financial professional to find out what you need to do to become financially secure in your retirement.
Complete the form on the right and receive a free copy of the best selling financial book "What All Stock and Mutual Fund Investors Should Know!"
Copyright, 2009, All rights reserved.
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