HealthyStock Mutual Fund

Mutual funds could include the complete HealthyStock of physical, spiritual, emotional/mental, and financial.  
Mutual funds could also include a whole class room full of individual HealthyStock individuals or a company, etc.
Annual Report to Stockholders
Quarterly Reports

Reasons why people choose mutual funds: safety, return, management, low expenses, diversity, advice
Simply stated, mutual funds are like an insurance policy. They are a conglomeration or collection of many different types of securities. When investors come together and want to buy securities as a group, you have a mutual fund. Each investor has a proportional stake in the securities based upon how much money he/she contributed. Mutual funds are a cheap and an easy way for the average person to own several hundred stocks.
there are three basic types of mutual funds: equity funds, fixed-income funds and money-market funds.

Aggressive Growth Funds

Aggressive growth funds are stock funds that have primarily one objective--maximum capital gains. Capital gains are just the increase in the value of an investment. These types of mutual funds invest in many different securities, including new industry stocks, small-company stocks, and practice investment techniques such as selling stocks short, futures, and options. Aggressive growth funds tend to be the most volatile of funds, as well. Examples of aggressive growth funds are Fidelity Magellan, Tudor, 20th Century, etc.

Growth Funds

Growth funds are those that invest in the stocks of well-established, blue chip companies. Dividends, and consequently steady income, are not the primary goal of these types of funds. Instead, they focus on increasing capital gains. Examples of growth fund are Fidelity Destiny I, Ivy, Janus, T. Rowe Price New Era, 20th Century Growth, Manhattan and many more.

Growth and Income Funds

Growth and income funds incorporate both increased capital gains and producing steady income. They are less volatile than aggressive growth funds. Examples of these funds are Evergreen Total, Investment Company of America, 20th Century Select, Vanguard Index Trust, Windsor II, etc.

Equity (Stock or Income) Funds

Equity funds allow investors to own a piece of the company that they have invested in, like common stocks. Stocks have historically been the best investment bar none. They have outperformed all other investment vehicles in the long term, but there is added risk. See the section on stocks and bonds for more information about this.

Equity funds seek to produce a high level of current income by investing primarily in equity securities of companies with solid reputations and a record of good-paying dividends. Decatur and Fidelity Puritan are examples of equity funds.

Balanced Funds

Balanced funds have a portfolio mix of bonds, preferred stocks and common stocks. Balanced funds generally aim to conserve investors' initial investment, to pay an income and to aid in the long-term growth of both the principle and the income. Examples include Phoenix balanced, Wellington, Loomis-Sayles Mutual, etc.

Bond Funds

These type of mutual funds invest in a mixture of corporate and government bonds at all times. The most sophisticated investors often switch between short-term, intermediate-term and long-term bonds, depending upon the direction of interest rates. Short-term bonds are those with maturity of less than three years; intermediate bonds are those that have bonds of three to ten years, and long- term bonds are over ten years. For a more comprehensive description of bonds, refer to that section.

Global Funds

Global funds are those that invest in equity securities of companies around the world and in the United States. These funds can change the percentage of their allocation in foreign and domestic markets, as well. For example, if there are major problems in foreign markets, global funds will allow the mutual fund company to pull out money invested there.

International funds

International funds invest in equity securities of companies located outside of the United States. Two-thirds of their portfolios must be invested in these companies at any one time. Many of these international funds invest in the emerging markets of nations around the world. They do not offer the flexibility of the global funds because of the two-thirds minimum requirement.

Fixed-Income Funds

Fixed-income funds are safer than equity funds, but as always, do not yield as high returns as the latter do. These types of funds are geared towards the investor who is approaching old age and doesn't have many earning years left. Many investors hope to draw a steady income from these types of mutual funds. Bond funds fall into the category of fixed-income funds. Fixed-income funds entail lending out money to buy Certificate of Deposits (CDs) or bonds, and as a result, your principle isn't expected to take a great hit in the event of the market heading south, but at the same time, your principle won't appreciate greatly when the loan comes due either.

Money-Market Funds

Money market funds are generally the safest and most secure of mutual fund investments. They invest in the largest, most stable securities, including Treasury bills. Money-market funds have beta co-efficient values of zero because the chances of your principle being eroded are very minimal. How do these funds work? Money-market funds are like fancy checking accounts and the best part is that they are risk-free. If you invest a thousand dollars, you will get that money back. It is simply a matter of when you get it back. A thousand dollars will get you a thousand shares. Usually the prices of shares in money-market funds are kept at around $1. As an investor, you will be given checks which you can use against your deposit. The minimum amount for these checks, however, is usually around $250 or $500.

When investing in a money-market fund, you should pay attention to the interest rate that is being offered, along with the rules regarding check-writing. Money-markets have allowed investors to reap high yields on their deposits, and have made the entire investment process more accessible to people.

The interest rates on money-market funds are changing nearly day to day. In times of inflation, these funds have had high yields--like 18% in the early 1980s. The interest rate is very important information. Many investors believe that even 1% is not worth the trouble of shopping around. The graph below shows the difference 1% makes on $5000 invested for different duration.

The Importance of 1%

Yield 1 Year 3 Years 5 Years 10 Years 15 Years
5.25% $5,268 $5,847 $6.490 $8,423 $10,933
6.25% $5,320 $6,022 $6,818 $9,296 $12,676
7.25% $5,372 6,203 7,161 10,257 14,690

Real Estate Funds

Real estate has often rivaled common stocks as amongst the most profitable of investments. A drawback to investing in real estate is that it is not very liquid. In other words, an investor cannot pick and sell and turn around and buy as quickly as with other investments. Mutual funds provide some of this liquidity. Real Estate Investment Trusts (REITs) are sold like stocks on an exchange. They are not exactly mutual funds. REITs provide the most liquidity, along with the lucrative benefits of investing in real estate. T. Rowe Price, Vanguard and others have many REITs that you can invest in.

Index Funds

Indices (pl. index), as you know now, provide a snapshot of how the market is doing on the whole. The most famous indices are the Dow Jones Industrial Average (about 30 blue-chip stocks) and Standard & Poor's 500 Index. Both of these give a view of how the market is doing in general, but for more a specific view, the Wilshire 5000 and the Value Line Composite provide more accurate information.

Index funds try to emulate a market index, most often the S&P 500. Because of expenses, these index funds perform a bit worse than the index itself. An example of a good index fund: Vanguard's 500.

A load is the fee or sales charge that an investor has to pay to buy certain mutual funds. Not all mutual funds have loads. Those without loads are called, quite logically, "no-load." About 60% of mutual funds carry what are known as "front-end" loads, or those that are assessed when the fund is first purchased. A "back-end" load, or one that is assessed when the fund is sold can be far more damaging if an investor does not pay attention to them. The maximum load allowed by the Securities Exchange Commission (SEC) is 8.5% of the original investment.

Most experienced investors don't buy full-load mutual funds. Loads can start adding up quickly, and there is no evidence to suggest that load funds perform better than no-load funds. You, as the investor, are paying for the research and "due diligence" of the broker when you pay a load. Once you become more aware and gain expertise, the need for a broker lessens.

Redemption fees are charged whenever you cash all or part of your shares. Unlike loads, redemption fees are usually small and they do disappear after a while. Nevertheless, a wise investor should be aware of whether or not his/her fund charges these fees and how much they are.

In 1980, the SEC authorized the 12b-1 (distribution) plan. This allows mutual funds to charge 12b-1 fees, which are used in the marketing and distribution expenses that are entailed. This includes costs of marketing, publishing annual reports and prospectuses, and to pay brokers themselves. Any 12b-1 fee in excess of 1% is too high. In essence, funds that charge a 12b-1 fee are not truly a "no-load" fund. These types of fees may seem minuscule, but when investing large amounts of funds, they can begin to add up quickly.

The most serious impediments that an investor may encounter when buying a mutual fund is a high sales charge (8.5%), extremely high volatility, and "back-end" loads, or deferred-sales charges. These types of fees can accumulate rapidly. There are numerous other handicaps which will undoubtedly effect fund performance, but none would be as serious as the aforementioned ones. These are things that any investor must look for before purchasing mutual funds. 

Distributions collectively refer to money that you receive as a result of your investment in a mutual fund. Dividends from common and preferred stocks, interest from bonds, net realized capital gains, return of capital, undistributed capital gains--all of these are distributions. When distributions are issued, you have various options. You can re-invest your distributions, which is the choice that about four-fifths of all investors take. This allows them to obtain more shares automatically. It is possible to re-invest just the income that you receive, and not your capital gains. The other possible option is to have your distributions check mailed to you

Remember that in addition to mutual funds being groups of funds that investors can buy, they may refer to companies that sell funds to people. In this case, mutual funds are like any other business. They have costs for maintenance and other expenses. An efficient fund is going to have lower expenses. The general rule of thumb is that the larger the fund, the lower its per-share cost is going to be. This is due to the fact that these mutual funds are doing business in great volume. There is definitely the economy of scale which such funds take advantage of.

Expense ratios are yet another factor that is very important to look at when buying a mutual fund. You can calculate a funds expense ratio by dividing annual expenses by average net assets. A fund's expenses typically include adviser's fees, legal and accounting fees, 12b-1 fees, but not commissions, interest on loans or income taxes. An expense ratio of over 2% is considered exorbitant.

Funds that perform poorly year after year have high expense ratios. That makes sense. Obviously, these funds are not managing their expenses to the highest level of efficiency, and this results in poor performance. But these numbers can be misleading. Consider this: A mutual fund allows investors in with a very low initial minimum investment. As a result, it will have a high expense ratio because it is more expensive to deal with a large group of small investors than a small group of large investors.

The net asset value (NAV) of a mutual fund is the price per share. For money-market funds, the NAV is typically $1. In no-load funds, you'll pay the NAV when you buy the shares. With load funds, the number of funds that you end up with depends upon the sales commission.

The NAV of a mutual fund is calculated by taking the value of the securities that the fund is managing and dividing that by the number of shares outstanding. A fund with net assets of $25 million and 1,000,000 shares outstanding has a NAV of $25.

A mutual fund has to send you a report called a prospectus in order to sell you anything. The prospectus tells you all about the fund that you have interest in--from its primary investment objective, to sales and redemption charges, all fees involved, minimum investments, address, phone number and a lot more. The prospectus can be quite tedious and boring, but is very important for the serious investor. He/She knows a fund well before investing money into it.

The most important aspects to pay attention to in the prospectus are: Date of issuance, minimum investment, objective, record of performance, degree of risk and fees.

If you can't make it through the entire prospectus, get a hold of these books: Mutual Fund Sourcebook and The Handbook for No-Load Fund Investors. They will give you the important information that you need, including some that is missing from prospectuses (i.e. volatility, who the portfolio manager is, etc.).

Yields

As the prices of the individual components of the mutual fund you have invested in fluctuate, so will the price of the fund itself. Thus, the yield that a mutual fund is earning you is constantly changing. This is different than the constant yield you would get with a CD. Figuring out yield can be confusing, but take it slowly and you will be able to do it. This is the way that it is done:
  • Add all income distributions (dividends, interests, or both) for the past 12 months.
  • Divide by the current NAV (minus capital gains distributions).
Capital gains are not a part of the yield you earn because they cannot be exactly quantified--they vary depending upon the state of the market. Instead, they are a part of the total return--yield plus gains or losses on the principle.

Many investors are deceived by the tricky nature of yields. A stock's yield depends on both the price per share and the regular dividend that the stock issues. If you have a stock with a NAV of $25, and a dividend of $2, the yield is 8%. (2 divided by 25 = 0.08, see the two steps above) If the price goes down to $20, the yield would rise to 10%. (2 divided by 20 = 0.10) Even though your yield went up percentage wise, the overall stock price is down 20%.

But you must understand that yields are a highly personal thing. Yields published in a newspaper are irrelevant to you if you did not invest on the date that the yield is based on. If you are not invested in anything and are simply comparing different funds' yields, then this information can be useful. Otherwise, you must refer to the date and amount of your investment for yield to have any meaning.

Dollar-Cost Averaging

Dollar-cost averaging is an important concept that investors should learn. When you utilize this technique, you are diversifying the prices at which you buy an investment over a period of time. As a result, you end up paying lower than average prices. Thus, you have "averaged" the "dollar-cost" at which purchased a fund.

This technique will prevent a major disaster from taking place, but at the same time, it will limit the profits that you reap, as well. If the prices had gone up during the entire year, dollar-cost averaging would have proved detrimental. At the same time, if prices had plummeted the whole year, the average cost of what you paid would have been lower than it could have been.

Market Timing

As anyone who has any experience in investing can tell you, the market is very dynamic and in a constant state of flux. Knowing the nuances of the market takes years of experience, but keeping a close eye on major trends will be helpful to any investor.

But you do not need to be an expert, sophisticated investor to spot the obvious signs. When the market is reaching all-time highs, it is usually time to lighten up on your investments. When the market is unusually low, it is an opportune time to buy. This is a mild version of market timing. Market timing is knowing precisely when to advance holdings in certain areas at certain times, and when to retreat, as well. Many academicians, however, will tell you that market timing is really not that helpful. To be a highly successful investor and a market timer, you need to be right 70 to 80% of the time. As a market timer, you need to be right twice: when to retreat your stake in an investment and when to get back in. 

One of the key ways to choose a fund is to evaluate its past performance. This is one of the integral characteristics of the successful investor that was described at the beginning of this section. By tracking how profitable a fund has been, you will gain a feel for the fund. Like stocks, mutual funds have their own "personality." Knowing this personality will help even the novice investor make decisions that are more intuitive and well-informed.

There is the commonly held belief by many investors that certain funds do better or worse than others because they briefly outperform or underperform the averages. This is thought to be only temporary. In the end, funds are supposed to revert back to the normal middle ground. If one looks at the performance of funds over time, it is true that most funds do become average performers. Nevertheless, look for the some of the following indications when choosing a fund:

  • The fund has outperformed similar funds.
  • Over the years, despite occasionally "off-years," the fund has made huge profits.
  • The fund consistently has made a profit.
  • The fund has outperformed some of the major indexes (i.e. Dow Jones, S&P 500, etc.)
Granted, some of these criteria may appear to be common sense, but you would be surprised how many advisers do not follow this. Often times, people plunge into a mutual fund, stock or some investment based on a "hot tip" or a "hunch." It is imperative that you know a fund well and can provide reasons for investing in it before you actually do so.


We cannot overemphasize the importance of having a well balanced and diversified mutual fund portfolio. But what does this exactly mean? A total investment of between $5000 and $6000 could make your portfolio fairly diversified. Even the mutual funds themselves can be diversified in a variety of investments. The mutual funds that are better diversified tend to do better than the non-diversified funds. The same is true with your overall portfolio. In short, diversification provides insurance. Generally, mutual fund investors tend to be conservative as the graph below illustrates. But they do vary the types of invesments that they are involved with at different times in life, as the table below depicts.

Diversification of Your Portfolio at Different Times in Life

EARLY TO MID CAREER Amount of Total Portfolio (in %)
Aggressive growth funds 15-20
Growth funds 30-50
Fixed-income (bond) funds 25-35
International 10-15
PRE-RETIREMENT
Aggressive growth funds less than 10
Growth funds 30-35
Fixed income (bond) funds 45-50
International funds less than 10
RETIREMENT
Growth funds 30-35
Fixed income (bond) funds 45-50
International funds less than 10
Money market funds less than 10

What is a Certificate of Deposit (CD)?

A certificate of deposit (CD) is like a loan from an investor to a bank or similar thrift institution. It is issued by these banking institutions and pays interest. CDs are among the most widely used money market instrument by investors overall. They are issued for varying maturities, and earn interest based on this maturity. The most common CDs include 31-day and 91-day maturities. For these CDs, the yields are tied to the 13-week Treasury bill rate. Six-month and 30-month CDs will generally yield higher rates, and they are also tied through some formula to Treasury bills. They are useful for the average investor because they are available in sums as little as $100. Bank CDs can be tailored to meet your individual requirements, as well. They are one of the most flexible investing tools. CDs are like bank deposits and are covered by federal insurance up to $100,000 per account.

"Jumbo" CDs

Jumbo CDs are often used by institutional investors and other heavy-duty investors. They have a minimum of $100,000 and therefore subject the investor to added risk not covered by the federal insurance. Jumbo CDs allow investors to obtain capital gains due to fluctuations in interest rates, but this tends to be a very sophisticated, high-level process for the individual investor.

"Designer" CDs

There have been many changes in the banking system in the last few years that have made possible a variety of options for CD investors. Interest rates vary with the length of the CD that you purchase. Longer maturities and larger CDs generally pay higher rates. Now it is possible to find practically any combination of maturity/CD size to meet investors' needs in what are called "designer" CDs. These types of CDs are offered by many savings institutions and allow investors to invest whatever sum they want in the form of a CD. If an investor has an odd sum of money available for investment, he/she can obtain a CD built specifically around their requirements.

Calculating Interest

Interest can be calculated in a variety of ways, as is the case with any investment. The way in which interest is ascertained is very important. Interest can be simple or compounded. A 7 percent CD rate that is compounded daily will have an effective yield of 7.25% over the course of a year. If it were compounded annually, then the effective yield would be only 7%. The interest rates on CDs vary practically day-to-day. These interest rates are determined, in large part, to competitive forces in the marketplace on Wall Street. These forces are collectively referred to as "market makers." This type of information is important to know when you are investing in a CD.

Obtaining a CD

CDs are most commonly obtained through a direct purchase from a savings institution. Some brokerage firms, however, pool together CDs from institutions from around the nation and make this available to investors. These pools are generally geared towards the jumbo CDs and, therefore, towards the institutional and heavy-duty investors. Again, these types of "pooled" CDs will not be wholly insured by the federal government.

The Investment Potential of CD

Most people invest in CDs for income. The maturities of CDs vary anywhere from seven days to seven years. Most of these CDs offer a fixed interest rate for the specified maturity. In recent years, however, variable CDs have been introduced. These CDs offer variable interest rates based on a preset formula. Variable CDs will offer interest rates that are slightly lower than the current rates, but in exchange, the investor is given added flexibility. The lower rates have the potential to rise in the future, and you would then be able to reap its benefits. On the downside, CDs offer very little protection against inflation. In addition, they do not offer individual investors any capital gains potential.

Strengths of Investing in CDs

There are both many strengths and weaknesses to investing in a certificate of deposit. CDs under $100,000 are insured by the federal government. For the individual investor, this is a very major cushion. In addition, the wide variety of maturities does not lock you in to any one situation. You have many options when investing in CDs--they are one of the most flexible investing tools. Furthermore, no fees or commissions are assessed when investing in CDs. They can also be purchased for a sum as little as $100. But best of all, CDs offer a secure fixed compounding of income over the selected maturity that you have purchased!

Weaknesses of Investing in CDs

The liquidity of CDs is very limited. You cannot withdraw your money from CDs prematurely without incurring some sort of penalty. In some cases, banks will not allow you to withdraw your money at all. If the economy of the nation becomes inflationary, investments in CDs will suffer a loss in purchasing power. Also, CDs will not yield you the highest possible yield as opposed to other investments, but the risk is also less in CDs. This is another example of the concept of Risk vs. Reward