Points to consider When Taking a Mutual Fund Purchase Decision
What Is a Mutual Fund?
Mutual Fund is a Pool of Money from Many Investors who wish to save their money and also earn some return on it at the same time. Investing in a mutual fund can be a lot easier than buying and selling individual stock and bonds on yourself.
Instruments Determining Your Mutual Fund Purchase:
Your capacity to take risk: Higher the risk an investor is ready to take greater the returns he will get on the investments. There is a direct relationship between risk and return.
For ex. A bond fund typically carries relatively lower risk and therefore a lower rate of return whereas an equity fund is a fund where the investments are made in aggressive place as a result returns derived from equity funds are generally higher in the long run.
Fees Included to the mutual fund: Mutual funds make their money by charging investors fees. Some funds charge a sales fee, called a load fee, which can be assessed either when you buy or sell fund shares.
Such fees are usually between 3 % and 6 %, with a cap at 8.5 %. All funds typically charge an annual fee called an expense ratio, which is made up of management fees, administration costs, and promotion and sales activity.
Turnover Rate: A mutual fund incurs cost every time it makes a transaction, which is passed on to the investors. The turnover rate represents how often the fund manager keeps stocks in the fund’s portfolio.
This means that the more often a manager buys and sells portfolio securities. The higher your expenses and capital gains taxes. If a fund has a turnover of 100% , its manager essentially buys a whole set of new securities every year. Ideally, a fund’s turnover rate should be close to 0% as possible.
Following are the Types of mutual Funds:
Specialty Funds: These funds focus on specialized mandates such as real state, commodities or socially responsible investing.
Index funds: These funds focus on track the performance of specific index such as the S&P/TSX composite index.
Balanced funds: These funds invest in a mix of equities and fixed income securities.
Equity funds: These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk that you could lose money. These funds invest in stocks.
Fixed Income Funds: Fixed income funds are an excellent diversification tool for investors’ portfolios. And as the name suggests, they can be used for generating income. Income securities such as government bonds, corporate bonds, municipal bonds, etc.
Money Market funds: Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as a substitute for bank saving accounts, though money market funds are not insured by the government, unlike bank savings accounts.