A mutual fund (called ‘unit trust’ in Asia) is an investment vehicle that pools money from many individual investors. A professional fund manager invests and manages these funds into stocks, bonds and other securities.

People usually invest in mutual funds because it is offers the advantage of broad diversification (it spreads your money over tens or hundreds of stocks to reduce risk) and professional management. However, do remember that as broad diversification reduces risks, it also reduces return.

First, here is the bad news. If you speak to most people who have invested in unit trusts in Asia (especially Singapore) or in mutual funds, most would report losing money or just earning measly returns of 2%-4%. In fact, in the year 2004, it was reported in the Straits Times that 559,000 Singaporeans lost $680 million by investing their CPF in these funds. By going to the largest unit trust distributor Asia, you can easily calculate that only 6% of unit trusts beat the S&P 500 over a ten-year period. What are the chances of you placing your bet on this 6%? Chances are you would have had lower returns that the index, while still having to pay those hefty sales charges and annual management fees.

How about the US mutual fund market? On average, less than 10% of mutual funds beat the S&P 500 index each year! What’s worse is that it is a different 10% each year. Less than 3% of mutual funds are able to beat the S&P 500 Index over a five to ten year period. So again, what are the chances of you beating the market through betting on the right fund? Only 3%! You have better odds at the Black Jack table. The worse thing is that the fund manager gets paid an annual management fee whether or not the fund makes money.

Why is it so difficult for most people to make money in mutual funds? There are four main reasons.

1) High Sales Charges & Management Fees

Most people buy mutual funds through banks and financial institutions at retail prices where there is a sales charge (front load) and high annual management fees (expense ratios).

In Asia, most banks & financial institutions sell unit trusts with a sales charge of 5%-6% and with annual fees of 1.5%-2%. It means that before you even begin, you are down 6.5%-8% on your investment and will be down another 1.5% every year. Your fund must outperform the S&P 500 by 6.5%-8% just to make it worth your while! Again, less than 10% of funds worldwide can achieve this every year and less than 3% can achieve this over five years.

2) Buying the Hottest Performing Funds
Most people choose funds based on high short-term returns. These are the funds that are normally pushed and advertised by financial retailers. They feature impressive and enticing returns like ‘This fund was up +65% in the last six months’.

The fact is that the best short-term performing funds tend to also be big losers in the subsequent years and long term. Why? Because these funds tend to be invested in hot stocks or hot sectors where the stocks have been rising rapidly and fund managers buy, riding on the momentum. That is why they post very spectacular returns. However, strong buying activity tend to push these stocks to be overvalued and sure enough, the stocks will come crashing down in the next few years. Mutual funds that consistently beat the S&P 500 tend to be invested in non-hot sectors and do not post spectacular short-term returns.

3) Limited Selection of Unit Trusts Locally

If you are in Asia, then you are normally exposed to only a limited number of unit trusts. A check with fundsupermart.com (the largest Asian unit trust distributor) shows that there are just about 300 funds available here compared to over 8,000 funds in the US market.

When I made a search on the Top Performing Fund sold locally (year 2005), I was presented with ‘Fidelity America USD’ with a 10-year annualized return of 11.27%. (Recall that the S&P 500 returned 12.08% a year). So, even the top-performing fund couldn’t beat the S&P 500 after deducting expenses & fees!!

4) Lack of Research Knowledge, Data & Tools

The single most important reason why investors lose money in mutual funds
is because they don’t have the knowledge or necessary information to search for the top 3% of consistent performing funds at the lowest costs. Investors tend to buy on the advice of their bank managers, facts from the fund fact sheet or prospectus which does not provide enough information to select the right fund.

Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his million dollar secrets and claim your FREE bonus report ‘Get Out Of The Rat Race Now’ at Secrets Of Self-Made Millionaires.

Which of your investments worried you most during the recent market correction? If it was one of your smaller holdings, you’re not alone.

We all have only so much time and so many brain cells to devote to investing. If you’re focusing yours on a tiny portion of your investments, the majority of your net worth is going unwatched.

Many investors I speak with are focused on only one or two of their investments or, worse, are fixated on the one they sold which has since gone up in price. Have you ever taken a flier? Bought a few shares of something on a tip?

Stop and ask yourself: suppose this purchase doubles or triples, what impact will it have on your net worth? It will be insignificant. And, any change to your net worth will be dwarfed by the movement of your primary investments.

Let’s put some numbers to this. If you have a stock or mutual fund which is 1% of your total portfolio and it doubles in value, it’s now only 2% of your total holdings. Your net worth has only increased by 1%. And, let’s face it, despite what we think, it’s unlikely that many (or even a few) of our investments will double over the short term.

The key to building a strong investment portfolio is to set your goals and diversify, but not have so many investments you can’t follow and to avoid investments which are too small to be meaningful. Here are some rules of thumb: no stock or bond should be less than 2% of your portfolio.

No mutual fund should be less than 5%. If you’re uncomfortable holding that much of a particular stock or fund, the investment is too risky for you and you shouldn’t own any of it. Think about the 2% and 5% guidelines for a minute.

If you own only stocks, that would be a 50 stock portfolio, a lot of stocks for anyone to follow. It would be 20 mutual funds. In both cases, more securities than you need to achieve diversification. So the above percentages are only minimums.

The maximum holding for a stock should be 5%, that’s 5% of your net worth tied to the fortunes of one company (remember Enron, if you’re wondering why).

For mutual funds, the bigger and safer the fund’s investment focus, the more you can invest in it. Bigger and safer means, for example, Big Cap stocks for both domestic and foreign funds, investment grade bonds and US Treasuries. To be conservative, you should put no more that 10% of your next worth into any one fund.

This brings us to index funds. If it’s a fund mirroring a big index, i.e., the S&P 500, the Lehman bond index, the Morgan Stanley Japanese stock index, you can invest more than 10% in a single fund. If it is a smaller index, i.e., the technology sector, the 5% rule applies.

Diversify, but don’t have so many investments that you can’t follow them all. Avoid investments which are so small they won’t make a difference. Focus on the big picture; don’t let the tail wag the dog.

Bill Byrnes is co-founder of MUTUALdecision, top mutual fundsa, providing investors with data on the top mutual funds, and author of the MUTUALdecision Blog. He’s been CEO, chairman and served on the board of directors of several public and private companies. He holds MBA and JD degrees and is a Chartered Financial Analyst with over 30 years experience in the investment industry.

Believe that a part of the economy will be particularly strong or a part of the stock market is undervalued?

Sector mutual funds are one way of investing in market niches. Sector funds enable you to pinpoint your investments in areas such as health care, biotech, and technology (or financials, after the Fed rate cut).

ETFs are another, but have some additional risks. The common cautionary note about sector funds is they’re just that: an investment concentrated in one area, where all the companies share similar characteristics and react to macroeconomic or industry events in the same way.

Thus, sector funds offer only limited diversification – within a group but a group where all the stocks will move in the same direction, for the same reason.

Sector funds offer the advantage of professional management. The portfolio manager should be able to pick the best stocks in the sector. They are a sound way for an investor to participate in sectors where they wish to invest a small portion of their assets but don’t want the risk of having to select a single stock – avoiding the needle in the haystack theory.

The hidden risk of sector funds, or more than meets the eye, is that mutual funds in the same sector may have very different investment philosophies and/or definitions of what comprises suitable investments. To illustrate this point, let’s look at two top ten funds, according to Morningstar, from the Utility and the Natural Resource sectors.

The JHT Utilities Trust (JEUTX) and the Fidelity Select Utilities Growth fund (FSUTX) are both top ten ranked utility funds but they’re different. JHT defines utilities to include telephone companies, such as A&T, and has a foreign stock among its ten largest holdings. The Fidelity fund is focused on power generation and delivery companies.

The two funds only have three stocks in common among their ten largest holdings. The same is true for the Blackrock Global Resources fund (SGLSX) and the Vanguard Energy fund (VGELX).

Blackrock’s top holdings are focused on exploration, drilling and coal. Vanguard owns more of the traditional large integrated oil companies. They have no stocks in common among their top ten holdings.

Neither strategy in our examples of top performing utility and natural resource funds is right or wrong, they’re just different. That’s the point.

Before investing in any sector fund (or any mutual fund), review its stated investment objectives and its top holdings. Then you’ll really understand the nature of the fund and if it’s the right fund for you.

Sector funds have their place in your portfolio, not as core holdings, but as a diversified way of making targeted investments in selected niches. Lastly, don’t forget sector funds carry more risk than broadly diversified (investing across many sectors) mutual funds.

Bill Byrnes is co-founder of MUTUALdecision, top mutual fundsa, providing investors with data on the top mutual funds, and author of the MUTUALdecision Blog. He’s been CEO, chairman and served on the board of directors of several public and private companies. He holds MBA and JD degrees and is a Chartered Financial Analyst with over 30 years experience in the investment industry.

The S&P 500 is up about 7.5% thus far this year. That’s a good return for just over six months. Will it keep going up? Consider this. The earnings of the S&P 500 companies are expected to grow by about 5% in 2007, according to a leading Wall Street brokerage firm. That means if the market was fairly valued at the beginning of 2007 and there were no big changes as to how investors think about the market, the S&P should only go up by 5% in 2007. Hence, game over. Come back next year.

But wait! Let’s examine each of the above assumptions. Was the S&P fairly valued at the beginning of 2007? Well, for the 12 months ended June 2007, it’s up 22%, so it had a pretty good run in the second half of last year and considering that 2006 was the fourth year of the current economic expansion, it’s likely the S&P was around fair value at the beginning of 2007. Okay, but doesn’t the market discount the future? And aren’t all the Wall Street analysts talking about 2008 earnings? Yes to both (although December 31, 2008 is 18 months away, so maybe there’s some uncertainty). 2008 S&P earnings are projected to grow by 7.5%. Amazing, the same percentage the S&P is up this year. I could end this report right now but I think it’s a coincidence.

I don’t know how far into the future investors look or whether they’re looking at 2007 or 2008 earnings. Either way, though, there’s not much of a case to be made for further gains in the S&P unless theress multiple expansion. (The P/E multiple has to expand when stock prices grow faster than earnings.)

So, will P/E multiples expand and the S&P continue to go up? Depends upon what makes multiples expand. Common factors include accelerating earnings growth (I don’t think 5% to 7.5% qualifies), an improving economic outlook (balance of trade, energy prices, inflation), or a reduction in interest rates. The last one’s a two edge sword. If interest rates fall (the Fed cuts rates) because of declining inflation expectations, that’s bullish (along with an expanding economy that’s the goldilocks scenario). If the Fed cuts rates because the economy is slowing down, that’s not good. A Fed cut for good reasons appears unlikely.

Thus, the S&P is likely to be flat to down over the next few months, until earnings growth is ready to take it higher.

Bill Byrnes is co-founder of MUTUALdecision, a website providing mutual fund data, and the author of the MUTUALdecision Blog. He’s been an investment banker with Alex. Brown & Sons and a Finance Professor at Georgetown University. He’s been CEO, chairman and served on the board of directors of several public and private companies. He holds MBA and JD degrees and is a Chartered Financial Analyst with over 30 years experience in the investment industry.

There was an excellent article discussing the pros and cons of investing in Exchange Traded Funds (ETFs) in the July 3rd Wall Street Journal: As ETFs Seek Niches, Risks Rise (unfortunately, The Wall Street Journal doesn’t allow us to link to their articles, perhaps that will change after Rupert Murdoch buys Dow Jones.) There’s over $500 billion invested in Exchange Traded Funds and, I believe, they will either replace open-end index mutual funds or force those funds to lower their expenses. A win for investors. Exchange Traded Funds generally have lower on-going expenses then index mutual funds. You’re charged a commission to buy or sell them, as for a stock, but the commission may be less then the fee charged by your broker, or fund, for buying a mutual fund (consider the share class you’re buying). They are priced, and traded hourly, not at the end of the day as with open-end mutual funds.

ETFs are excellent tracking vehicles for many different kinds of investments. Want to invest overseas? In commodities? Buy an Exchange Traded Fund. (Not to get carried away, there are index funds that track most of the indices that do ETFs.)

So what’s not to like about Exchange Traded Funds? Going back to The Wall Street Journal article, Lipper, which tracks fund performance, reported that a disproportionate number of ETFs showed up on its losers (poor performing) list. For some it is simply a case of tracking a narrow and volatile index, nanotechnology, for example. The lesson here is that investors need to consider the riskiness of any investment they’re making. An Exchange Traded Fund doesn’t diminish the risk of a cutting-edge technology, volatile commodity, or stock market of an emerging country. What a good one will do is reflect the performance of whatever index its is designed to track.

Like most new products, and Exchange Traded Funds are a new product, there will be some product-specific risks as well. Some won’t track their underlying index due to design error or too narrow a portfolio. Costs won’t automatically be less, turnover and taxes will be issues for some and to mitigate these risks stick with Exchange Traded Funds issued by well-known institutions.

Vanguard, the godfather of index funds, has joined the ETF party and is coming out with more. (See When is a Door Not a Door for more information on and what John Bogle, the founder of Vanguard, thinks of them.) Vanguard’s action is perhaps the best evidence to date of the rise of ETFs.

The moral to the story is to consider Exchange Traded Funds whenever you’re considering an index fund or want a low cost and liquid way to obtain exposure to a particular type of investment. Just remember that this doesn’t reduce the risk of the investment class.

Bill Byrnes is co-founder of MUTUALdecision, a website providing mutual fund data, and the author of the MUTUALdecision Blog. He’s been an investment banker with Alex. Brown & Sons and a Finance Professor at Georgetown University. He’s been CEO, chairman and served on the board of directors of several public and private companies. He holds MBA and JD degrees and is a Chartered Financial Analyst with over 30 years experience in the investment industry.

One of the mantras of mutual fund investing is to look at a fund’s turnover before you buy it. The implication is that a high turnover is bad. (Turnover is the percentage of a funds holdings that are traded during a year. Funds can have a turnover greater than 100%, which means that their average holding period per investment is less than one year.) Many mutual fund screening tools have portfolio turnover as one of their filters and you can usually find a fund’s turnover (expressed as a percentage) on the fund’s snapshot page or by doing a little digging on the fund’s website.

Here’s the first argument as to why turnover is bad. Higher turnover results in higher expenses because of higher transaction costs. This is true both for stock and bond funds, although turnover is even more relevant for bond funds. Why? Transaction costs are greater and trading spreads are wider for bonds (except for US Treasuries) than for stocks. And, the upside potential of a bond or bond fund is limited, as compared to a stock or stock fund, particularly for short maturities and high quality, so transaction costs have a greater impact on returns.

Tax inefficiency is the second argument as to why an investor should avoid mutual funds with a high turnover. If you hold your mutual fund in a taxable account, rather than in a tax-deferred account such as a 401-K or IRA, the fund’s taxable gains (and losses) are taxed to you in the year they occur. The higher the turnover the greater the likelihood that these gains will be short-term and you will be taxed accordingly.

I’ll add my own reason to look at turnover. Just like the kid who couldn’t sit still in school, higher than average turnover might suggest a nervousness or lack of conviction on the part of the fund manager. Portfolio turnover varies by asset class. For example, small cap growth stock funds generally will have higher turnover than big cap value funds. So, turnover is somewhat relative. Some fund screeners allow you to sort for funds with turnover equal to the average for a particular fund type or you can look at the turnover ratios for funds within the same group and estimate what’s the norm. Unless your fund’s turnover is much greater than its peers, you shouldn’t worry.

High turnover is bad, right? Wrong. For two reasons. The turnover expense is part of a fund’s overall expense and all funds are required to disclose their expense ratios. (A fund’s expense ratio is another sort in most fund screens and appears in its snapshot, oftentimes very near its turnover.) Unless a fund creates a lot of unwanted taxable income for you, its total expenses are of greater concern than its turnover, and a fund’s expense ratio pales in importance when compared to its return. Once you’ve set your risk level, the best investment is the fund with the highest return, even if it has a higher turnover or higher expense ratio than its peers.

Return always comes first. Don’t forget its after-tax return. So buy mutual funds with the highest returns consistent with your risk level and investment objective, and consider putting those funds with high turnover in your tax-deferred account.

Bill Byrnes is co-founder of MUTUALdecision, a website providing mutual fund data, and the author of the MUTUALdecision Blog. He’s been an investment banker with Alex. Brown & Sons and a Finance Professor at Georgetown University. He’s been CEO, chairman and served on the board of directors of several public and private companies. He holds MBA and JD degrees and is a Chartered Financial Analyst with over 30 years experience in the investment industry.

It’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.

Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He will answer your financial question FREE. at http://www.guardingyourwealth.com

Since its inception in 1998, the Roth IRA, (”Roth” for its legislative sponsor, the late Senator William Roth, and “IRA” for individual retirement account), has been one of the most popular retirement vehicles in the United States.

The Roth IRA is particularly useful for hands-on investors and the self-employed, but almost everyone can benefit from opening and fully-funding a Roth IRA.

A Roth IRA is a legally tax-sheltered savings and investment account. Qualifying individuals can put up to $4,000 per year into their Roth IRA’s, and all money invested is allowed to grow completely tax-free.

Whereas a traditional IRA features the benefit of tax-deductible contributions, a Roth IRA uses after-tax money. However, withdrawals from a traditional IRA, which can begin at age 59 1/2, are fully taxed at the accountholder’s personal income tax rate, whereas withdrawals from a Roth IRA are 100 percent tax-free.

This means that if a person began saving $4,000 per year at age 22 and earned an average annual return of 9 percent, she could retire at 59 1/2 with over $1 million in her Roth IRA–and the government wouldn’t see a dime!

It is also important to note that while investment earnings cannot be withdrawn from a Roth IRA until age 59 1/2 without substantial penalty, (except in special cases, such as a first-time home purchase), the principal put into a Roth IRA can be taken out at any time for any reason. This gives the Roth IRA more flexibility than most other retirement accounts.

Income Restrictions For Using a Roth IRA

So what’s the catch? There really isn’t much of one, unless you don’t earn any income or simply make too much money in the eyes of the government. “Earned income,” as defined by the IRS, refers only to wages, salary, and self-employment earnings.

People who earn less than $4,000 by these measures are unable to take full advantage of a Roth IRA–a person can’t invest more into his account than he earns in a given year.

On the other end of the financial spectrum, individuals who make more than $95,000 or married couples filing jointly who make more than $150,000, (as determined by “MAGI” or Modified Adjusted Gross Income, a complex formula created by Congress to prevent abuse of Roth IRA’s by the wealthy), face a sliding scale of restrictions.

Ultimately, individuals who earn more than $110,000 or married couples with income in excess of $160,000 are completely unable to use Roth IRA’s, however, if your income should ever reach such lofty levels, any prior investments into a Roth IRA remain tax-sheltered.

It’s also important to note that couples who make less than $150,000 are allowed to invest up to $8,000 into a joint Roth IRA, even if only one spouse works outside of the home.

Investment Strategies Within a Roth IRA

Although most commonly invested in stocks, bonds, or mutual funds, money within a Roth IRA can be invested in almost anything, including real estate. One asset class that should be avoided is municipal bonds.

This is because the primary advantage of municipal bonds is their tax-exempt status, and since all investments within an IRA are tax-exempt, capital would be better allocated in securities that are normally taxable, and thus offer higher returns than municipals.

Roth IRA’s are great for hands-on investors who like to engage in active trading because there are no capital gains tax consequences within an IRA, and the higher short-term capital gains taxes on securities held for less than one year often take a serious bite out of trading profits in non-tax-sheltered accounts.

However, certain investment products and strategies favored by active traders, such as options and shorting stock, are prohibited within IRA’s, with the exception of writing covered calls.

The Ownership Society

Finally, it is important to note that if your employer sponsors a retirement plan such as a 401(k), you are still eligible to open and manage your own Roth IRA, whereas you are not allowed to have both a 401(k) and traditional IRA. This is yet another advantage that makes the Roth IRA right for almost everyone.

So if you haven’t already opened a Roth IRA, you probably should. The maximum annual contribution goes up to $5,000 in 2008, and with defined-benefit pensions on the decline and the future of Social Security uncertain, self-directed retirement vehicles like the Roth IRA may be the only way for today’s workers to retire comfortably.

The power of compound interest means that beginning to save while you’re young makes a huge difference–but it’s never too late to start. The law even allows people age 50 and over to make special “catch-up” contributions to their Roth IRA’s.

And best of all, unlike Social Security and many corporate-sponsored retirement plans, you are the owner of your Roth IRA. Not only can a Roth IRA provide for a comfortable, potentially luxurious retirement for you and your spouse, but also something to pass on to your family or favorite charity.

While there are certainly both pros and cons to the proposed “Ownership Society,” the Roth IRA is virtually all positive.

William Smith the author provides additional financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Roth IRA (All is Free)

Mutual funds are one of the financial world’s most popular investment vehicles, and for good reason.

For a relatively small investment, these funds give individual investors the ability to buy a diverse portfolio of stocks and / or other financial instruments – all in one transaction.

If you have just two or more mutual funds, chances are that you’re more than adequately diversified. This means that you don’t have to worry about one bad apple (i.e. Enron) destroying your entire investment account.

How Mutual Funds Work

So how do these funds work? Each fund is actively managed by a mutual funds professional. This is someone who has several years of experience analyzing and trading stocks or other securities, probably has an advanced degree, and has worked his or her way up the ladder to what is essentially the top of the money management profession.

The fund manager chooses the securities that the mutual fund owns. These funds can be composed of stocks, bonds, and / or other financial instruments.

The types and balance of securities (i.e. 60 percent stocks, 35 percent bonds, 5 percent cash / money market), and the investment objectives and strategies (i.e. aggressive growth or equity income) are listed in the mutual fund’s prospectus.

This way investors know what they are getting into each time they buy new mutual funds.

Mutual funds are split into shares, just like stocks. For example, a fund may own 5,000 shares of Microsoft (MSFT); 10,000 shares of General Motors (GM); 20,000 shares of Alcoa (AA), etc., and be split into 100 million shares itself.

If the net asset value (NAV) of the shares is $1 billion, then each share of the fund would be worth $10. The fund manager buys and sells shares of stock that the fund owns – you, in turn, can buy or sell your shares of the fund, but only at the end of each trading day.

No Load Mutual Funds vs. Load Mutual Funds

So what’s the catch? Well, mutual fund managers have to be compensated for their services, so they charge you a fee which is sometimes called a “load.”

Essentially, you are paying them to have the heartburn and ulcers associated with watching the stock market eight hours a day, 52 weeks a year, so that you don’t have to. Whether or not the fund managers earn their keep depends on how skillful they are, and how the fund’s fees are structured.

Load mutual funds charge either front-end loads or back-end loads. Front-end loads charge you a percentage of your initial investment.

For example, if you invest $10,000 each into a pair of front-end load funds with loads of 3 percent and 5 percent, you will only be investing $9,700 and $9,500, respectively. How long will it take your funds to make up the $800 you’ve lost right off the bat?

Instead of charging you up front, back-end load funds don’t charge you a load until you withdraw your money.

These funds are usually a better deal, because the size of the loads usually decreases the longer you leave your money in the fund.

For example, a back-end load fund might have a load of 7 percent if you withdraw your money the first year, with the load going down by 1 percentage point each year, and reaching 0 percent by the eighth year.

Mutual Funds – Just Say No To Your Broker; Buy Direct Instead

Typically, full-service brokers with offices on Main Street only sell front-end load funds. This is because they receive an up-front commission on the sale of these products.

Mutual funds are designed for average investors – you don’t need a broker to recommend these funds for you, and you don’t need to pay the extra sales charges.

There are hundreds of good, no-load funds that charge only a small annual management fee (which load mutual funds charge in addition to their loads) available directly from fund companies.

Most funds have a minimum investment of $2,500, but this can usually be waved if you commit to regular monthly investments of as little as $50.

William Smith the author provides additional financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Mutual Funds (All is Free)

An IRA is an Individual Retirement Account, which provides either a tax-deferred or a tax-free way of saving for future retirement. There are many varied forms of accounts within the world. Depending on the superb financial goals and situations of each individual, though maybe Long-established IRA and Roth IRA are the more familiar choices.

An Individual Retirement Account, or an IRA, is a special tax-advantaged account that allows you to build savings for your retirement. One of the basic benefits of an IRA is that your investments earnings compound is tax-deferred. Other potential tax benefits are tax-deductible contributions or, expression within the case of the Vantage point Roth IRA, tax-free withdrawals.

A long-established IRA allows tax-deductible contributions for up to $4,000 per year, and also in most cases, if you or someone that understands and has expert knowledge is over the age of 50 years.

Whatever you contribute towards your account comes off your yearly income, thus reducing total tax liability. However, once the money in an account is withdrawn, it is subject to standard income taxes and an additional 10% penalty if withdrawn before the age of 59 1/2.

An exception is made if the money is new for purchasing a house or to cover any official higher education costs. Standard income tax still applies, but the 10 percent penalty is waived off. This provides a magnificent investment tool with flexibility for important purchases in IRA.

IRA in brief:

Roth IRA was created in 1997 to help middle-class Americans. These accounts are not tax-deductible, but yet provide even better flexibility than most common accounts. Assistance to the account can be inhibited at any time without being subject to penalty or tax, though interest earned resource within the account is.

After a period of five years, both contributions and earnings aspect element within the account can be withdrawn without penalty or taxation. The same benefits concerning education and housing also apply as with the most common IRA.

A Roth IRA isn’t for everyone, although individuals who file taxes using a single status are eligible for the full contribution as long as they don’t go above $95,000 per year in earnings, and $110,000 for partial contributions.

Joint filers face an earnings cap at $150,000 and $160,000 for full and partial contributions respectively. High-level corporate executives do not have to apply for this special class of account.

Choosing an account can be a very complicated decision, depending on the magnificent financial situation and can require the services of a certified financial planner. Another important decision can be whether or not to turn over a long-established account into the used Roth IRA.

Frankly speaking, if the person is eligible, then contributing to a Roth account is always more advantageous for the fact that income taxes will not apply later when the money is taken out, provided the person adheres to all the set guidelines.

But always be sure there is enough time to absorb the costs of the rollover, since it will be taxed. If you or someone that understands and has expert knowledge were taking the money out of the IRA.

A Most Common IRA Can Be Converted To A Roth IRA By The Following Methods:

Rollover, a distribution from a most common account can be contributed to a Roth IRA within 60 days after distribution.

Trustee-to-trustee transfer, the financial institution holding the well established retirement account assets would provide directions on how to transfer those assets to a Roth account with another financial institution.

Same trustee transfer, as with the trustee-to-trustee transfer, the financial institution holding the well-established account assets will provide directions on how to transfer those assets to a Roth. In such a case, things would be simpler because the transfer occurs within the same financial institution.

A conversion results in taxation of any untaxed amounts element within the long-established account terms. Also, the conversion is reported on Form 8606, Nondeductible IRA.

The most significant advantage of Roth is that while investors contribute to them on an after-tax basis, they have the possibility to withdraw their earnings on a tax-free basis, assuming sure conditions are met.

The ability to make a full contribution of $4,000 to a Roth is limited to employees with a modified adjusted gross income (MAGI) of below $95,000 (single tax filing status) or $150,000 (joint filing status).

Traditional IRA’S investors realize the greatest tax advantage from long-established when they can make contributions on a deductible pre-tax basis. Yet, many public sector employees are not eligible to make fully deductible pre-tax contributions to a most common IRA.

In many cases, if you are an active participant in an employer-sponsored retirement plan then you must have modified adjusted gross income (MAGI) below established limits in order to make fully deductible contributions to a well-established account.

If you or someone you know and/or your spouse do not actively participate in an employer-sponsored retirement plan, you can make fully deductible contributions to a well-established IRA no matter what of your MAGI.

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