Back to Basics With Mutual Fund Investing

It’s an investment company, that’s regulated, that take your money and money from hundreds of thousands, even millions, of other investors, to construct a portfolio. Things like stocks, bonds, real estate, or other securities. Each investor in the fund gets a slice of the total pie. Mutual funds make it easy to diversify. Most funds require only moderate minimum investments from a few hundred to a few thousand dollars, enabling investors to construct a diversified portfolio much more cheaply than they could on their own.

There are many kinds of stock funds. The number of categories is dizzying. Some examples: growth funds, which buy shares of burgeoning companies; sector funds, which buy shares of companies in a sector, such like tech or health care; and index funds, which buy shares of every stock in a particular index, such as the S&P 500. Don’t’ forget about bond funds. They come in many varieties too. There are bond funds for every taste. If you want safe investments, consider government bond funds; if you’re willing to gamble on high-risk investments, try high-yield bond funds, also known as junk bond funds; and if you want to keep down your tax bill, try municipal bond funds

Even if you don’t sell your fund shares, you could still end up stuck with a big tax bite. If a fund owns dividend-paying stocks, or if a fund manager sells some big winners, shareholders will owe Uncle Sam’s bill. Tax-efficient funds avoid rapid trading and match winning trades with losing trades. So make sure whenever you look at owning a mutual fund, you know the tax implications, generic hydrocodone including the tax efficiency of the fund you are looking at. That’s all public information, and is available with any fund rating services like Value Line or Morningstar. Or you can simply call the fund company on their toll-free phone line and ask.

Before buying a fund, look at how risky its investments are. Can you tolerate big market swings for a shot at higher returns? If not, stick with low-risk funds. To assess risk level, check these three factors: the fund’s biggest quarterly loss, which will help you brace for the worst; its beta, which measures a fund’s volatility against the S&P 500; and the standard deviation, which shows how much a fund bounces around its average returns. Low expenses are also crucial. In order to cover their expenses – and to make a profit – funds charge a percentage of total assets.

Fund shareholders (that’s you) are paying fund managers big bucks to find the best stocks in the market. The fact is a majority of funds don’t beat the market in most years. That is, you’re better off buying all the stocks in the Standard & Poor’s 500 index or in the Wilshire 5000 index than paying someone to select what he thinks are the best ones. Index funds, are much lower maintenance and tend to have much lower costs. There are some caveats of course. But index funds should be a part of your portfolio. Take a look at your portfolio and make sure you are balanced in this regards. It’s one the smartest things you can do with your portfolio.