Smartway To Invest In Mutual Funds

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A mutual fund is a safe investment for small investors who seek stable returns and safety of principal. Mutual funds are also preferred cover.titlefor the variety of choices available and the ease of operation.

A mutual fund is a pooling of resources of several investors and the fund manager invests the money in instruments like equity stock, corporate and government bonds or Treasury Bills. Depending on the risk preference of the investor, the fund manager monitors performance of the portfolio of investments. Mutual funds bring better than average results because of diversification of risk. They are relatively free from the shocks of business cycles that could affect individual company stocks. Close monitoring of price movements allows quick decision-making with respect to buying or selling.

The efficiency of returns from mutual funds depends on the investing style of the fund manager and he is guided by the objectives of the specific scheme. Actively managed schemes have plenty of movements and their net asset values change by the day. Most open-ended equity schemes fall in this class. On the other hand, index funds earn returns close to the specified market index. That means the returns are fairly fixed and net asset values do not change dynamically.

Compensation for the fund manager’s services and administrative expenses of the fund are paid from the earnings of the fund. The operating expenses are usually pegged at a low 0.5% to 2% of the invested funds. The technical term used to denote expenses ratio is load. There can be loaded or no-load funds. As a thumb rule, funds that earn higher returns usually have higher load and index funds have no loads. It is also a widely touted argument that if you wish to earn higher value, you must suffer higher load. But then, one must take this statement with a pinch of salt.


It is not always true that higher loads should accompany higher returns. The fund’s expenses ratio indicates the profligacy of the fund manager and besides the legitimate administrative fees, minimizing unnecessary expenses would result in low or nil load to the investors.

Therefore, the most important criterion for choosing mutual funds is balancing the return and expenses. No load mutual funds are usually index funds and those that invest in emerging markets or sectors. Most professional financial advisers would give adequate details of the load on the funds. No load mutual funds usually encourage investors to play with a long-term perspective and impose restrictions on short-term speculative trading. They also pass on the economies of scale to the investors as the larger asset base can absorb fixed costs more efficiently and the percentage of variable operating costs comes down.

Some important no load mutual funds are E-Trade S&P 500 Index Fund, Fidelity Spartan 500 Index Fund and Vanguard 500 Index Fund. Financial dailies and websites of rating agencies give regular updates on the no load mutual funds ratings.