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August 17 Written Voices Blog
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Excerpts from my book
Chapter 8
Investment Vehicles That Drive Your Portfolio
The Securities Market
Mutual Funds
What is a Mutual Fund (MF)?
A mutual fund is sort of like an index market where groups of individual securities are pooled into one fund. Example: if you want exposure to the technology industry, you could purchase individual securities (stock from an individual company) or you could invest in a mutual fund that contains many technology companies like IBM, Microsoft, Apple Computers, and Intel.
Mutual Funds invest in all of the other asset classes: Stocks, Bonds, Options, Futures, Currencies, and Money Market Securities.
These funds are managed by an investment company. When you invest in a mutual fund you get the advantages of the company’s:
- Research capabilities:
- Asset allocation
- Diversification
- Professional management
Most mutual fund managers have a specific style of management (see Equity Management Styles).
Some funds are aggressive in that they look for rapid increases in valuation and price appreciation. Others may be more conservative and are geared toward generating revenue through sales, dividend and interest income.
There are hundreds of Mutual Funds in the marketplace, and most likely, there are several that you can choose from that match your financial goals and objectives.
Most importantly, you will want to select funds that meet your risk management, asset allocation criteria, and goals.
Here are some examples of the types of mutual funds offered in the market place. For a full description, see the Glossary in the back of this book.
• Aggressive Growth
• Asset Allocation
• Balanced Funds
• Exchange Traded Funds (ETF’s)
• Fixed Income Funds
• Income or Income and Growth
• Index Funds
• International, Global, Emerging, and Developing markets
• Large Capitalization Funds
• Life Cycle/Target Date Funds (2020, 2030, 2040, 2060 Funds)
• Medium Capitalization Funds
• Private Equity Funds
• Real Estate Investment Trusts (REIT’s)
• Small Capitalization Funds
• Tax Exempt
• Total Return
• U.S. Government securities (Treasury, Notes and Bonds)
Things to do prior to investing in a Mutual Fund
When you take that Financial Retreat, take time to read the “Prospectus” of the fund(s) you want to invest in. It always helps to do your homework before you invest. (See Anatomy of a Prospectus, Chapter 15).
All Mutual Funds have ratings that give you an idea of their performance history. There are many (too many) Mutual Fund Rating Agencies. Each one has their own unique method of ranking Mutual Funds. The two most visible rating agencies are Morningstar and Valueline (see Exhibit 10 in the Appendices). There are many other rating agencies like Lipper (https://financial.thomsonreuters.com/en/products/data-analytics/financial-research/lipper-fund-research.html), Zacks (zacks.com), Barron’s (https://www.barrons.com/), Bloomberg (https://www.bloomberg.com/, Forbes Magazine, Kiplinger’s Newsletters, and the U.S. News, which can provide you with information on the many Mutual Funds in the marketplace. Which one you choose is your choice.
Your Plan Administrator can tell you who they use as their rating agency. When looking up ratings for a mutual fund, the rating agencies should tell you:
- What securities are held in the fund?
- The Mutual Fund’s Professional Management Team:
- Where they got their investment education?
- How many years of experience they have?
- History of their working background.
- Years in the investment business.
- Years with this firm and/or other firms.
- What their record of accomplishments are in terms of investment performance for the past 2-5-10 year periods (if they have been together that long)?
You can subscribe to Morningstar and Valueline via the internet, or you can go to any public library and look them up.
