BEST FUNDS TO BUY
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Best Tips on Mutual Fund Basics
Fund Selection, Analysis, Diversification, Taxation, Best Practices & More
- How to Get Started Investing With Mutual Funds Investing begins before buying the first mutual fund (or prior to buying the next one). If you are just getting started, you may want to try beginning with a balanced fund. You will also want to ask questions: What is it that you would like to accomplish with your savings? Do you have specific goals, such as saving for retirement, or do you have some broadly defined goals, such as the accumulation of wealth for the general purpose of strengthening your financial security? What is your time horizon? One year? Five years? 10 years?
- Know Your Risk Tolerance Before choosing your funds, you need to have a good idea of how much risk you can tolerate. Your risk tolerance is a measure of how much fluctuation (a.k.a. volatility—ups and downs) or market risk you can handle. For example, if you get highly anxious when your $10,000 account value falls by 10% (to $9,000) in a one-year period, your risk tolerance is relatively low—you can’t tolerate high risk investments.
- Determine Your Asset Allocation Once you determine your level of risk tolerance, you can determine your asset allocation, which is the mix of investment assets—stocks, bonds and cash—that comprises your portfolio. The proper asset allocation will reflect your level of risk tolerance, which can be described as either aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).
- Review the Basic Types and Categories of Mutual Funds Mutual funds are organized into categories by asset class (stocks, bonds and cash) and then further categorized by style, objective or strategy. Learning how mutual funds are categorized helps an investor learn how to choose the best funds for asset allocation and diversification purposes. For example, there are stock mutual funds, bond mutual funds and money market mutual funds. Stock and bond funds, as primary fund types, have dozens of sub-categories that further describe the investment style of the fund.
- Build Your Portfolio of Mutual Funds Building a portfolio of mutual funds is similar to building a house: There are many different kinds of strategies, designs, tools and building materials; but each structure shares some basic features. To build the best portfolio of mutual funds you must go beyond the sage advice, "Don’t put all your eggs in one basket:" A structure that can stand the test of time requires a smart design, a strong foundation and a simple combination of mutual funds that work well for your needs.
- Learn How to Choose the Best Funds Now that you know your asset allocation, you need to begin the selection of your mutual funds. If you have a broad choice of mutual funds you begin by using a fund screener or you may simply compare performance to a benchmark. You’ll also want to consider important qualities of mutual funds, such as fund fees and expenses and manager tenure.
- Understand Mutual Fund Fees Mutual funds have various fees attached to them. In addition to the Expense Ratio, you'll need to understand costs associated with buying and selling shares of funds, in addition to taxes and more.
- Know the Basics on Mutual Fund Taxation How does one reduce taxes on mutual funds? Which types of funds are best for taxable accounts? Why did you receive a 1099? Understanding mutual fund taxation will help you improve your overall returns by being a smarter investor. As they saying goes, "Nothing is sure in life but death and taxes." However, taxes can be minimized or even avoided with regard to mutual fund investing. Therefore, with knowledge of the basics on mutual fund taxation, you will be enabled to increase your overall investment portfolio returns.
- Use the Best Mutual Fund Research Sites Mutual fund research can be made easier with a good online research tool. Whether you are a beginner or a pro and if you are looking to buy the best mutual funds, review an existing fund, compare and screen different funds or you are just trying to learn something new, these mutual fund research sites are among the best.
- Learn How to Analyze Mutual Fund Performance Past performance of a mutual fund may not be a guarantee of future results but if you know how to analyze performance--if you know what to look for and what to avoid--you can make better investment decisions.
- Understand the Basics of Statistical Analysis Statistical analysis of mutual funds is just what it sounds like--a means of studying the quantitative aspects of a fund to help the investor gain an understanding of past performance for a clue about future results. Yes, there is no "guarantee" of future results but investing is not about guarantees--it's about taking calculated risk. Fortunately, you don't have to be a math wizard to use statistical analysis in mutual fund research. All of the key quantitative measures have already been calculated. So your only knowledge or skill is to understand how to use these measures to choose the best mutual funds.
- Learn How to Diversify With Mutual Funds Diversification with mutual funds is more than just putting your eggs into different baskets. Many investors make the mistake of thinking that spreading money among several mutual funds means they have an adequately diversified portfolio. However, different does not mean diverse.
- Avoid the Dave Ramsey Mistake Dave Ramsey is a good entertainer and seems like a genuinely nice person. However, with regard to mutual funds in specific, his investment philosophies are bordering on dangerous. Mutual fund investors can get some good tips from his talk radio show but they are wise to understand the difference between entertainment and sound investment practices.
- Know the No-Load Fund Families (and Why to Use Them) Without a doubt, no-load funds are the best choice for mutual fund investors. But what are the best no-load funds and where can they be found? With thousands of mutual funds to choose from and hundreds of different fund families offering them, an investor can suffer from choice overload and possibly make needless mistakes.
- Consider Using an S&P 500 Index Fund If you guess that the best S&P 500 Index funds are those that have the lowest Expense Ratios, you are mostly correct. However, in addition to low costs, there is a delicate balance of science and art to indexing that makes only a few mutual fund companies able to offer the best index funds.
- Consider Adding Sector Funds Sector Funds focus on a specific industry, social objective or sector such as health care, real estate or technology. Their investment objective is to provide concentrated exposure to specific industry groups, called sectors.
What is Systematic Investment Plan or SIP?
SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a MF by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in an MF. Thus, you can invest in an MF without altering your other financial liabilities. It is imperative to understand the concept of rupee cost averaging and the power of compounding to better appreciate the working of SIPs.
SIP has brought mutual funds within the reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, one-time investment.
While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years.
Even for the cash-rich, SIPs reduces the chance of investing at the wrong time and losing their sleep over a wrong investment decision. However, the true benefit of an SIP is derived by investing at lower levels. Other benefits include:
SIP has brought mutual funds within the reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, one-time investment.
While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years.
Even for the cash-rich, SIPs reduces the chance of investing at the wrong time and losing their sleep over a wrong investment decision. However, the true benefit of an SIP is derived by investing at lower levels. Other benefits include:
1. Discipline
The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundreds every month, rather than set aside a large sum for investing in one shot.
2. Power of compounding
Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. Let’s explain this with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a corpus of Rs 12.23 lakh while person B’s corpus was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-corpus. That difference is due to the effect of compounding. The longer the (compounding) period, the higher the returns.
Now, instead of investing Rs 10,000 each year, suppose A invested Rs 50,000 after every five years, starting at the age of 35. The total amount invested, thus remains the same -- Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.
3. Rupee cost averaging
This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.
People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.
4. Convenience
This is a very convenient way of investing. You have to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one’s account and will send the confirmation for the same.
5. Other advantages
· There are no entry or exit loads on SIP investments.
· Capital gains, wherever applicable, are taxed on a first-in, first-out basis.
The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundreds every month, rather than set aside a large sum for investing in one shot.
2. Power of compounding
Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. Let’s explain this with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a corpus of Rs 12.23 lakh while person B’s corpus was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-corpus. That difference is due to the effect of compounding. The longer the (compounding) period, the higher the returns.
Now, instead of investing Rs 10,000 each year, suppose A invested Rs 50,000 after every five years, starting at the age of 35. The total amount invested, thus remains the same -- Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.
3. Rupee cost averaging
This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.
People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.
4. Convenience
This is a very convenient way of investing. You have to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one’s account and will send the confirmation for the same.
5. Other advantages
· There are no entry or exit loads on SIP investments.
· Capital gains, wherever applicable, are taxed on a first-in, first-out basis.
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Good information...
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