Metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used proxy for the U.S. stock market, are hardly at bargain levels. This has lead several market pundits to predict single digit annual returns for domestic mutual funds over the next decade. While pursuing the search for the best mutual fund, some mutual fund investors tend to focus exclusively on fees and expense ratios. The rationale is that by choosing mutual funds with low fees, investors will have more of their capital invested. Also, no load mutual funds with low expense ratios will pass on more of the returns they earn to their shareholders. Is shopping for the lowest fees and expense ratios a smart way to select mutual funds? Not always. The answer depends on the type of mutual fund you are evaluating, the time you can devote to evaluating and managing your mutual funds investments, and the type of cost incurred.
If you believe markets are generally efficient and prefer to invest in an index mutual funds to achieve an index-like return, shopping for the best index mutual fund based on low fees and a low expense ratio makes good sense. The portfolio manager of an index mutual fund endeavors to invest the fund's assets to track the index as closely and cost-effectively as possible. Larger index funds have an advantage in that they can spread their operating costs over a larger asset base. Some of the interesting index mutual fund options currently available include no load index mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index Fund (Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios of 0.09%, 0.10%, and 0.18%, respectively.
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.
The operating expenses incurred by a mutual fund are a combination of fixed and variable costs. As the asset of a mutual fund increases, the fixed cost gets spread over a larger asset base. Therefore, the expenses incurred to operate the mutual fund as a percentage of the fund's assets should trend lower.
If you believe markets are generally efficient and prefer to invest in an index mutual funds to achieve an index-like return, shopping for the best index mutual fund based on low fees and a low expense ratio makes good sense. The portfolio manager of an index mutual fund endeavors to invest the fund's assets to track the index as closely and cost-effectively as possible. Larger index funds have an advantage in that they can spread their operating costs over a larger asset base. Some of the interesting index mutual fund options currently available include no load index mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index Fund (Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios of 0.09%, 0.10%, and 0.18%, respectively.
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.
The operating expenses incurred by a mutual fund are a combination of fixed and variable costs. As the asset of a mutual fund increases, the fixed cost gets spread over a larger asset base. Therefore, the expenses incurred to operate the mutual fund as a percentage of the fund's assets should trend lower.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Investing In Real Estate With A Professional And Experienced Agent You have full permission to reprint this article provided this box is kept unchanged.
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