More Mutual Funds
Posted by Gail | Filed under Investing
News of a picnic at the end!
Last week I talked about fixed-income mutual funds. If you’re prepared to take a little more risk to get a potentially higher return then you’ll want to look at Balanced mutual funds. Balanced funds are managed to achieve both income and capital appreciation using a mixture of equity, fixed-income and liquid investments. The equity investments provide the opportunity for growth while the fixed-income and liquid investments provide regular income.
Balanced funds are the most highly diversified because their assets are so widely spread. Fund managers vary the balance between equity and fixed-income investments depending on market conditions. For example, in a period of declining stock market conditions, a balanced fund will likely concentrate the majority of its investments in fixed-income securities. If stock-market conditions are strong, the fund will invest in more equities. The result is reduced risk.
A new variation on this theme is the asset-allocation fund. Asset allocation is the latest investment fad and refers to the balancing of volatility and risk with the desire for increased return (sounds like a balanced fund, doesn’t it?).
Equity funds invest in common shares of companies. When you purchase an equity fund, you’re usually hoping for a significant increase in the value of your investment over the long term. If the unit value goes up and you sell some or all of your units, you’ll realize a capital gain. However, if the unit value goes down and you sell some or all of your units, you’ll have a capital loss.
Equity funds vary in growth potential and in risk, depending on the specific assets held in their portfolios. There are dozens of different types. There are small-cap funds and large-cap funds and all the variations in between. There are growth funds, momentum funds, and value funds, and all the other management styles investors use to describe themselves.
Within the equity fund category, there is a sub-category referred to as “specialty” funds. These funds tend to concentrate their assets in one particular sector of the economy, a single industry, or in one specific country. Some specialize in energy, high technology, telecommunications, pharmaceuticals or precious metals. Others specialize in one country such as Japan or Germany, or in a region such as South America or Europe. When the fund specializes in countries with new economies, they are referred to as emerging-markets funds. Returns on specialized funds tend to fluctuate considerably from one year to the next. They have the potential for very high capital appreciation, but can also be extremely risky.
When bond and equity funds buy assets in the markets around the world, they are referred to as international funds. They venture abroad because of the additional diversification this offers the portfolio. While economic conditions in one country or region may adversely affect the fund, the situation in another may be very healthy, balancing the fund’s performance. In fact, foreign investment can create returns simply because their value may increase due to changes in exchange rates.
Indexed funds are, for the most part, managed by a computer. They are designed to duplicate an underlying index, such as the Standard & Poor’s 500 Index. Unlike other mutual funds where individuals or teams search high and low for just the right investments, an indexed-fund manager simply invests to match the performance of the index to which it is tied. (Why you would buy one of these instead of buying the index directly, I don’t know.) The advantage of an indexed fund is that you’re guaranteed to do as well as the market does. Also, because there’s no research required and few transaction fees, the management fees are much lower (but not as low as buying the index directly). This is one reason why “buying the index” has become so popular. Much has been written about whether actively management funds are better given their much higher management costs, and index-investing is offered as the alternative.
Socially conscious funds let you vote with your wallet if you’re concerned about investing in companies engaged in business that is socially unattractive or that you consider unethical. These funds have chosen to exclude stocks that do not fit with their social consciences. A green fund would look not only at a company’s financial performance, but also at how environmentally conscious it is. Some ethical funds exclude companies involved in the manufacture of weapons or cigarettes, while others exclude companies who trade with countries known for human rights violations.
Next week: Dollar Cost Averaging
Last week: The Many Styles of Mutual Funds
I’ve had a couple of comments about whether we will hold a Picnic in the Park this summer. Well, Saver Queen was way ahead of you. We’re planning one for Sunday July 11 in High Park in Toronto. More details to follow.
HEY: Don’t forget to vote on this week’s poll!
May 18, 2010 at 8:02 am
Great News on the Pinic Gail. Last year due to Unforntunate events My wife and I couldn’t attend, We are planning on making this next one.
Regards,
Jason
May 18, 2010 at 8:39 am
Thanks for these articles on mutual funds, Gail. I have bookmarked them to sit down and read through them again so I can absorb everything you’re saying.
The picnic sounds wonderful, can’t wait to hear more about it.
May 18, 2010 at 8:43 am
So last week, after selling a rental property in order to pay off all but 2 of our debts (which will be paid off in 12 & 19 months), I called BMO to talk about my accounts. I wanted to close my High Rate Savings & open a TSFA & and RRSP account… so we are talking, they are drooling over my high balance of my chequing account trying to get me to commit to a plan.
So I start asking questions about which is best for me and the lady says well since you are just starting on this I would recommend this… and when I ask about other products she says that is for investors who are more comfortable with investing than you would be just starting out… Umm but we haven’t really talked about my risk tolerance, what returns I am looking for etc or what my future contribution plans are. SHe just keeps telling me how great the 1%-3% that I would be earning on these accounts would be. Well, I don’t exactly think that 3% is what I want to be aiming for even if it is guaranteed.
SO that phone didn’t end well, I didn’t open any accounts, I think I am the type of person who needs to sit face to face with someone and figure out a plan that way…
Anyone have suggestions where I should be starting/who I need to talk to? I’ve been reading & rereading Gails blogs for over a year, and will be completely debt free (including cars, except the mortgage) in the 19 months mentioned above. In the meantime we’ve been “playing”with a couch potato investing plan to see if in theory it will work for us – and are comfortable with how we’ve set it up on paper…
Now I know why people keep money under their mattress or buried in the backyard!
May 18, 2010 at 8:53 am
Looking forward to the picnic details – we’re planning on driving down from Ottawa for the weekend for this.
May 18, 2010 at 9:09 am
Picnic! Awesome….
@ CE You didn’t mention how old you were…. ?
May 18, 2010 at 9:40 am
Gail, you seem to be advocating that if people are interested in “buying the index”, they should do it directly with a brokerage account rather than buying index funds. I think it’s important to point out that the brokerage fees to do that would be fairly high and this would not be a good strategy for investors who do not have a lot of money to invest.
May 18, 2010 at 9:46 am
I will try to be at the pic-nic even if I’m from Quebec.
I will see if it fit in the budget!;)
May 18, 2010 at 10:03 am
@Jay Only if they are purchasing on a frequent basis — depends upon frequency of purchase.
May 18, 2010 at 11:00 am
Great news about the picnic plans. Unfortunately, I will be working that day so won’t be able to attend. Hope everyone has a blast!
May 18, 2010 at 12:53 pm
Great article! However I’m not sure how one would buy the index directly. You mean the stocks that make up the index? But that changes, so I as a small investor would have quite a lot of commision to pay (9$ per transaction) to keep up with it, and also I don’t have the time to research all this and keep track of what’s in the index…
May 18, 2010 at 3:11 pm
@ ioana
You can buy an exchange traded fund (ETF), which mirrors an index but has lower fees than a mutual fund.
In Canada, check out iShares – such as the TSX 60 index fund (ticker XIU)
In the US, check out SPDRs – such as the S&P 500 index fund (ticker SPY)
May 18, 2010 at 3:27 pm
Once again, Gail, answering questions that I didn’t even know I had. Thanks.
May 18, 2010 at 3:46 pm
Wish I could make the picnic, but don’t live in Toronto, but am visiting in July. Just happens to be the weekend after to see Bon Jovi Concert and go to Wonderland.
May 18, 2010 at 4:00 pm
We made it to the picnic last year and we’re looking forward to this year’s picnic! Woohoo!
May 18, 2010 at 5:03 pm
@ Kat,
Dh and I are both 30. Equity in our home, but mortgage should be paid off in 15 years without any other “extra” payments on the mortgage so planning on sooner, will readjust after we are otherwise debt free and are comfortable that we have a large enough emergency fund (our current short term goals).
4 children under 10 that we are taking advantage of the RESP 20% that the government will put in (that is a great return in my eyes) although they are not maxed since dh and I agree that we want to be in a position to help, not willing to put ourselves further behind our own financial “schedule”…
TIA
May 20, 2010 at 1:00 pm
Thanks for posting about the picnic, Gail! Can’t wait to see you and the other bloggy participants again!
May 25, 2010 at 5:55 am
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