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Posts Tagged ‘mutual fund investing’

It has been consistently demonstrated that your investment returns aren’t so much a function of what stocks your invested in, but what sectors/asset classes your invested in. In the dot com boom, it didn’t matter what dot com stock you invested in, if you were invested in dot com companies, you probably did alright. During the dot com bust, it wasn’t just a couple select companies that went down, it was just about all of them. Because of this tendency for similar stocks to move together, it is much more productive to be able to simply buy ” or short – a type of stock, then try and nail the exact right company. But how can you gain exposure to a sector without taking unnecessary risk based on the company?

The answer lies in a little tool known as the ETF. ETF stands for Exchange Traded fund. Think of it as a mutual fund that isn’t actively managed, focuses on a certain area, and can be traded like a stock without incurring extra penalties. Each ETF holds a number of companies, similar to a mutual fund, and its listed price is simply the overall value of the companies it holds.

ETFs can focus on certain regions; China for instance, is represented by the FXI. ETFs can focus on certain sectors; Those playing financial stocks may find XLF interesting. It can even focus on certain capitalizations; Those wanting diversification across small cap companies can make a single investment in IWM.

But why shun the mutual fund? Why take the new guy over the established king? Lets start with the tax advantage. When mutual funds endure large sell offs, they have to liquidate many positions, some of which are currently at a gain. They then have to pay capital gains on those positions, and this negatively impacts their return. It would be an understatement to say that Mutual funds generally have higher expense ratios in general compared to ETFs. It can sometimes cost as little as 8 dollars to get into an ETF whereas a mutual fund of 20,000 that grows to 60,000 over a 20 year period may have conservatively lost as much as 18,000 to its competent managers.

Another advantage held by ETFs is their great convenience over their mutual counterparts. Many mutual funds have redemptions fees if you exit within 30 days, whereas ETFs aren’t plagued by this problem. Also, unlike mutual funds, you can go short an ETF, benefiting from a fall in a sector instead of a rise. ETFs can also be bought and sold any time during the trading day, using limit orders, stop losses, and all the other tools you can use for buying stock.

Another important consideration is that most of the more liquid ETFs are optionable. This means that option-savvy investors can harness the power of stock options to change the risk-reward profile of their positions, and risk-conscious investors can use stratagems such as the covered call and protective put to protect their investment.

When investing in ETFs, its important to consider how exactly that ETF works. This can usually be found with a quick google search. While most ETFs attain their returns simply by holding the underlying securities, other ETFs use more exotic means to match their benchmark/investment objective, sometimes with varying success. Particularly important is the differentiation between an ETF and an ETN. ETNs are debt based investments, similar to bonds in some ways, and so their value is also partially dependent on the issuer. For this reason, investments in ETNs should be approached with caution, especially in the current, credit-tight market.

ETFs are a powerful tool for both the intelligent investor, and the active trader. Their ability to hone in and diversify within a given industry, or region of the world is invaluable when riding the larger megatrends that happen periodically in investment. Similarly, the ability to trade them just like a stock, using techniques such as shorting, options, and the various order types make them an invaluable asset for the active trader. For those believing the efficient market hypothesis, they even allow passive index investing at a cost far below that of a mutual fund.

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I have basically two sets of questions:

1)
Everybody talks about investing money in Mutual Funds. Suppose, you want to invest some money in Mutual Funds (CLOSE ENDED for 3 years say) (say in HDFC Tax saving Mutual Fund).

- How you will be paid your return after 3 years ?

- Does the Mutual Fund company AUTOMATICALLY send your profit (if any) by check to your home address ?

- who pays the return (profit) ? I am confused, how one will get the return (profit) ?

2)

Now suppose, you want to invest some money in another Mutual Fund (OPEN ENDED i.e you can withdraw money at any time…right ?) . Now, say you want to discontinue after 3 Months.

- what do you have to do ? I have read that you have to “sell the Mutual Fund” ….but selling to whom ? how do I get the customer to sell?

- is it necessary to sell ?

- if I dont sell but want to withdraw what will happen ?

very much confused.

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I also have other questions…..

Which is better way to invest?

(1) with dividend or without dividend ?
(2) close ended or open ended ?

I have also read a fact , that suppose you invest some money in a mutual fund company. But is the mutual fund company is doing badly and the fund is constantly dropping in value….that means, you are not getting any profit…right ? your money is gone….correct ?

I keep reading on Morningstar and other finance websites about how “such and such mutual funds are getting too bloated with assets,” and that this is especially a problem for funds that focus on small-cap stocks. And I see that Vanguard and many other companies have closed funds to new investors–even Vanguard’s Windsor II, which focuses on huge corporations, has restricted new investors. Let’s say a mutual fund purchases more that 50% of a company, why is that bad? Isn’t that what Warren Buffet’s Berkshire Hathaway does?

I have some settlement money that I would like to invest in something that will yield good return. Everyone tells me to put it in a mutual fund. Can someone explain to me what exactly a mutual fund is? Will I be able to cash it out whenever, or do I have to keep it in for a certain number of years? Can I buy a mutual fund through Scottrade? What’s the best mutual fund?