the world finance review by crazy financier

How Mutual Funds Work

2007-10-29T09:22:00.001-07:00

How Mutual Funds WorkMutual funds are good options for American investors to meet their financial goals. These funds offer professional management and diversification of the funds invested. Mutual funds assets in 1990-2000 rose from 1.065 trillion to a whooping 6.965 trillion dollars. 10% Americans owned funds in 1980 and by 2000, the percentage increased to 49%.

What are Mutual funds?

A company dealing in mutual funds invests the money of several investors in bonds, stocks, securities, assets and several other short-term money-market instruments. The combined holdings owned by the mutual fund are known as its portfolio.

When you invest in a mutual fund you become a shareholder of the company. Each share in a mutual fund company is the representation of he investor 's proportionate ownership of the fund holdings and the income generated. You earn dividends when the mutual fund company earns a profit, however, your shares will decrease in value if it faces a loss. A professional investment manager does the buying and selling of securities for the growth of the fund.

Types of mutual funds:

Equity funds: These funds involve only common stock investments. They can earn a lot of profit, but are also very risky.

Fixed income funds: They include corporate and government securities. These funds offer fixed returns at a low risk.

Balanced funds: This is the combination of bonds and stocks with a low risk. However, the investment does not earn a lot through these funds.

How it works?

Mutual fund shares can be purchased from the company itself or a broker. There are secondary market investors also, like the New York Stock Exchange. Per share net asset value of the funds or NAV is the price that you pay for buying a mutual fund share. It also includes the shareholder fee that is imposed by the fund, at time of purchase.

The best feature of mutual funds is that these shares are redeemable. You, as an investor, can sell your shares back to the broker. In order to accommodate new investors, mutual fund companies generally create new shares and sell them. They keep selling their shares continuously till they become large.

Investment advisers act as separate entities and are responsible for managing the investment portfolio of the mutual funds. Investing in mutual funds tends to lower the risk factor because they are the result of diverse investments.

Since someone else manages your investments, you need not worry about keeping constant tabs on the investment, though a periodical check enhances your personal book of accounts. Managing funds is the full time job of the fund manager and he is responsible for the performance and health of the investment.

The rate of returns in mutual funds is based on the increase or decrease of the value, during a specific period. Returns of a fund indicate the track record. It is important to remember that the past performance cannot guarantee future results.

As in the case of any investment or business, mutual funds also have risks associated with the returns. It is essential to set your financial goals and requirements, before investing in a mutual fund.

Investing: Dow Drops 2700 Points

2007-10-09T11:45:00.001-07:00

Investing: Dow Drops 2700 PointsIt 's a headline that every stock market investor fears will happen. The markets crash and their hard-earned nest egg evaporates. They're forced to go back to work and must resort to eating beans and rice. Is that fear justified? No.

Stock markets around the world dropped on Tuesday. The news media echoed that it was the biggest one-day drop since September 11th, 2001. The Chinese stock market dropped almost 10%. Here in the U.S., the major indexes were down over 3%. At one point the Dow Jones Industrial Average dropped over 150 points in one minute!

Should investors panic? No. The world is not coming to an end. The world 's economies continue to be strong and are growing. Interest rates are still low compared to historical standards. And yesterday 's decline follows 7 months where the markets recorded increases of 15%, 25%, 40%, and even 77%.

First, let 's put yesterday 's drop in proper perspective. I remember watching the ticker back in 1987 when the stock market tumbled. It 's something that I will never forget and is one of the reasons I have developed the systems and strategies I use to manage my client 's money today.

On Tuesday the Dow Jones Industrial Average dropped a little over 400 points. To equal the market drop in 1987, Tuesday 's total decline would need to be 2700 points. Tuesday, the Dow dropped 3%. In 1987 it dropped around 20%!

Second, there are going to be times when the markets make rapid adjustments. This applies not just to the stock markets, but to bond and real-estate markets as well. The introduction of electronic trading and the proliferation of hedge funds only add to volatility.

That may have been what occurred yesterday. Hedge funds can be leveraged as much as 30:1. That means if they have one dollar, they borrow thirty dollars more and invest it all. If the markets go up, a hedge fund can make enormous returns. If the markets drop too much then they get a 'margin call'. That 's when those that lent the money decide they want it back--right away.

When someone trading on margin receives a margin call, typically they have to sell investments to generate the cash needed to cover the call. When you're leveraged 30:1, it means you have to sell a lot of investments. Hundreds of millions of dollars can be sold in a matter of minutes with the use of electronic trading. That selling causes the market to go down, which causes others to receive margin calls. So they then have to sell.

Many of today 's mutual fund managers haven't experienced a decline like 1987 or 2001. Initially, they hang in there. But as the markets drop further they succumb to the fear and decide to start dumping investments. In my opinion, that 's why the sell off picked up speed Tuesday afternoon.

That brings me to my second point. Who 's watching your money? When things go bad they can go bad in a hurry. That 's why it is so important that you know there is someone who is closely monitoring your money and will take action if necessary to protect it.

Unlike most managers, I employ multiple strategies in each account. Some are short-term, some medium term and others long-term. Days like yesterday illustrate the benefits of this multi-strategy approach. The money in short-term strategies was quickly moved to cash. Some sales actually took place the day before the big drop. Others occurred shortly after trading started. If 25% of an account is quickly moved to cash in such instances, that reduces the overall risk to the portfolio substantially.

Third, it 's important that you be selective in what you sell. Liquidating short-term positions allows me to hold on to high-dividend paying stocks and other investments that should comfortably weather the storm. Even if the market languishes, I hold strategies that pay dividends of 6-9%.

Lastly, after the market closed yesterday I saw a picture of a U.S. soldier carrying an Iraqi child needlessly killed. I talked with a client who was undergoing additional testing to see if she has cancer.

While it 's my job to monitor and manage my client 's money and your job to safeguard your nest egg, it 's important to remember in the end, there are things in life that are much more important than money.

Portfolio Turnover: Should You Care?

2007-10-04T07:13:00.001-07:00

One of the incantations of the investment of investment funds mutualist is to look at funds ' the sales turnover of S before you buy. The implication is that a high sales turnover is bad. (The sales turnover is the percentage of the possessions of funds which are traded during one year. The funds can have a sales turnover 100% larger than, which means that their period holding average by investment is less than one year.) much of tools of sifting of investment funds mutualist have the sales turnover of booklet while one their filters and you can usually find funds ' sales turnover of S (expressed as a percentage) on the funds ' page of instantaneous of S or while making dig on the funds ' Web site of S. Ici ' S the first argument as for why the sales turnover is bad. A higher sales turnover has like consequence of the higher expenditure because of the higher costs of transaction. That is worth both for the current funds of obligations and, although the sales turnover is adapted much more for the funds of obligations. Why? The costs of transaction are larger and the commercial diffusions are broader for bonds (except treasures of the USA) that for stocks. And, the possibility of output of a bond or bottom of obligations is limited, compared to funds of current placement in actions or, in particular for short maturities and quality, thus the costs of transaction have a greater impact on returns. The inefficiency of taxes is the second argument as for why an investor should avoid the investment funds mutualists with a high sales turnover. If you hold your investment funds mutualist in a taxable account, rather than in an account tax-deferred such as a 401-K or one WILL GO, the funds ' taxable profits of S (and losses) are imposed on you per year when they occur. More the sales turnover plus the probability is high that these profits will be are large short-term and will be imposed to you consequently. I will add my own reason to look at the sales turnover. Just as the child who could not sit down yet at the school, the sales turnover higher than average could suggest an irritation or a lack of conviction on behalf of the manager of funds. The sales turnover of booklet changes by the class of capital. For example, the funds of placement in actions of growth of small capital letter generally will have a sales turnover higher than of deep seas of value of hat. Thus, the sales turnover is somewhat relative. Some sieves of funds enable you to match for funds with the sales turnover equal to the average for a particular type of funds or you can look at the reports/ratios of sales turnover for funds in the same ones groups and evaluation which ' S the standard. Unless your funds ' the sales turnover of S is much larger than its pars, you should not worry. Is the high sales turnover bad the, right one? Badly. For two reasons. The expenditure of sales turnover belongs to the funds ' total expenditure of S and all the funds are required to reveal their coefficients of expenditure. (Funds ' of A; the coefficient of expenditure of S is another kind in majority of the screens of funds and appears in its instantaneous, often very close to its sales turnover.) unless funds create much nondesired assessed income for you, its total expenditure is of a greater concern than its sales turnover, and funds ' the coefficient of expenditure of S fades in the importance once compared with its return. Once you placed your level of risk, the best investment is the funds with the highest return, even if it has a higher sales turnover or a coefficient of expenditure higher than its pars. To turn over comes always initially. Not to forget its return after imposition. To thus buy mutualists with the highest returns conformed to your level of risk and the objective investment funds of investment, and to consider them to put these funds with the sales turnover raised in your tax-deferred account.