Since their inception, mutual funds have been a very popular investment vehicle for the investor who is not that much of a risk taker. Investors with limited knowledge, money, and time have benefited from investing in mutual funds because of their simplicity and several other attributes including:

Diversification – ask any seasoned investor and they will tell you that diversification is the best way to balance out your portfolio and minimize risk with your investments.

Divisibility – mutual funds can be purchased in smaller denominations than round lots of stocks and range from as little as $100 up to $1,000.

Economics of scale – since you can take advantage of the purchase and selling size of most mutual funds, this helps to reduce the cost of transactions.

Liquidity – the ability to get in and out of mutual funds without much difficulty defines how liquid they can be due to the fact that you can sell them in a short period of time or hang on to them for years.

Professional management – mutual funds are typically managed by a “fund manager” who is responsible for taking the investor’s fund pool and invest those funds to the greatest benefit to the group of investors concerned.

Mutual funds and hidden fees

Despite the fact that mutual funds are one of the safer investments you can make, not all of them are alike, especially where the charges and fees with purchasing them are concerned. What you need to be aware of is the fact that there hidden fees that oftentimes exist with different mutual funds. Most mutual funds come with a load fee or sales charges. Those funds that do not are referred to as “no-load” mutual funds.

There are several fees attached to mutual funds that you need to anticipate whenever you are purchasing them, including:

• loads or sales charges (mentioned above)
• management fees
• 12 B-1 fees (fees which help to determine the funds’ value)

When a fee is asked for up front, it is referred to as a “front-end” load. Additionally, there are “back-end” fees as well which usually diminish the longer you hold on to the fund.

However, it is the third fee above where other fees or hidden fees are typically found. You need to watch for hidden fees with these 12 B-1 fees, or “C shares” as they are more commonly referred to. Typically, these fees are charged to cover certain fund operating costs including:

• marketing
• prospectuses
• sales
• software

How to protect yourself from hidden fees

In order to protect yourself from unpleasant surprises involving hidden fees, the first thing you want to do is examine the fee structure of the funds you are investing in. Numerous strategies have been developed by investment management companies for the purpose of keeping the money rolling in. Although it is not uncommon for fees to be charged to cover a variety of fund operating expenses, the total fee charges oftentimes harbor other hidden fees that you are not aware of. So it is imperative that you examine the fee structure as thoroughly as you can.

When a country is encountering business and/or social activity while in the process of rapid industrialization and growth, they are said to be “emerging” markets. According to “The Economist”, a weekly English language international affairs and news publication, as of the first of this year (2010), there were now 28 recognized emerging markets in the world today. Currently, the largest emerging market is the ASEAN–China Free Trade Area, which was launched on January 1, 2010.

The upside to investing in emerging markets

In many countries that are deemed as emerging markets, such as China and India, their industrial base is literally ballooning, meaning that the growth potential is extremely high. Smaller companies who sell the right products or services can benefit from this and grow into much larger companies in a very brief period of time, making them extremely viable investment opportunities for the smart investor. If you get in on the ground floor with these companies, your investment will grow as the company grows.

5 steps to investing in emerging market funds

Emerging markets typically involve those countries that were once considered to be “3rd world” nations, but now they are rapidly growing into more developed nations. It is a transitional period which usually witnesses rapid economic development and growth. One of the best ways that you can diversify your investment portfolio is to invest in emerging market funds. Here are 6 steps you can take in order to invest wisely.

1. Do your homework first – it is imperative that you learn which countries are considered to be strong emerging markets before you ever invest a dime in any of them. Emerging markets today include countries such as China, India, Mexico, and Thailand.

2. Assess your tolerance for risk – there is inherent risk involved whenever you want to invest in an emerging market as these markets tend to be extremely volatile at times. Most emerging markets have the following risk factors to contend with:

• changes in that country’s national policies
• currency exchange risk
• economic instability
• political instability

When all else fails, remember the cardinal rule of investing – never invest more than you can safely afford to lose.

3. Market fluctuation tolerance – due to their expanding and growing nature, you will see a lot of up and down movement in these markets. Sometimes these fluctuations can be very abrupt. So you need to know how well you can tolerate these movements in those markets.

4. Look at these investments for long-term purposes – because of the risks involved with these markets as well as their volatility, it can take years for that market to develop. So if you’re looking for quick profits, emerging markets are not the way to go.

5. Investment percentages should be limited – a safe move is to only allocate 5% of your investment portfolio to emerging markets. This allows you to get a true feel for the risk and volatility tolerance factors.

In the simplest of terms, a mutual fund is a large group of investors who pool their funds together for a fund manager to invest for them. Typically, all mutual funds come with fees and sales charges. Since 1940, there have been three basic types of mutual funds in the US which include the following:

• closed-end funds – an investment vehicle which involves a limited number of shares available
• open-end funds – referred to as “mutual funds”, these feature the ability to issue and redeem the fund shares any time
• unit investment trusts (UIT’s) – investment companies (US) which typically offer a fixed or unmanaged security portfolio, has a definite lifespan, and which are assembled by sponsors and sold to investors through brokerages

Based on how these fees are charged mutual funds are usually classified into 2 distinct categories – load and no-load funds.

What is the difference between load and no-load mutual funds?

The difference between load and no-load mutual funds is as follows:

Load Mutual Funds – involves charges for shares (or units) when they are purchased, plus any applicable management and operational fees. These will usually range from 4% to 8% of the amount you invest. However, sometimes there is only a flat fee depending on who the fund’s provider is. This amount is typically referred to as a “sales fee” and added to the purchase price of the mutual fund. For example, if you were to purchase a 5% load fund for $1,000, you actually be investing only $950 since $50 of your investment would be the commission paid to the broker.

Load Mutual Funds are broken down into two types – Back-End or “Class B” funds and Front-End or “Class A” funds. Back-End load funds never incur any fees up front. When you cash out the mutual fund, the standard fees will apply. On the other hand, Front-End load funds are just the opposite meaning that you will pay the charges and fees when you initially purchase shares in the fund.

No-Load Mutual Funds – these funds enable investors to purchase shares or units whenever they want to without ever encountering a broker’s commissions or any sales charges. However, certain banks and brokers may have their own company fee schedule whenever you redeem or sell any 3rd party funds.

It is always recommended that you find out in the beginning what type of fund you are investing in since some mutual funds involve shares or units of those funds while others do not. If you are a novice where the investment industry is concerned, you would be wise to hire a financial planner or broker to assist you. Either that or do your own trading online.

If on the other hand, you have educated yourself about the different kinds of mutual funds that are currently available, than No-Load Mutual Funds are the better option as you will not incur any broker’s commissions or fees. Just remember that education is the key whenever you are considering investing in any financial instrument.

You’re in luck because something called a tax deferred annuity allows you to build wealth for the future without being taxed until you withdraw the money upon retirement or whenever you decide to receive payments.

So what is a tax deferred annuity?

To start off, an annuity is a contract with an insurance company which guarantees periodic payments (known as annuity rates) after you reach a certain age in exchange for paying premiums to the company now. The return on your current investment can be grown by indexing the annuity fund to things like stocks, bonds, mutual funds, or simply savings accounts.

Often, an annuity’s growth is taxed for the person who invests in it. However, with a tax deferred annuity, the only time the annuity is taxed is when the annuitant receives payments at a future date. The income is treated as income earned in the year the annuity payment is made, and reported on your tax return.

What are the advantages?

There are a lot of pros and cons of annuities but the major advantage of this annuity is that it doesn’t involve a hectic annual reporting requirement. Instead of buying and selling stocks and other investments every year and having to report the capital gains to the IRS, you can simply let the annuity provider deal with year-to-year investment decisions. You only need to deal with declaring the income when you withdraw it in the future, while still benefiting from growth in the stock market or whatever other investment the annuity you decide to purchase is indexed to.

Additionally, even if you don’t personally have much knowledge on economics and investing, by purchasing a tax deferred annuity you end up getting the advice of financial experts. A large insurance company with an interest in growing its profits as much as possible pays experts to manage the annuity fund, and you benefit personally from their expertise without having to lift a finger to learn about the stock market yourself.

Inheritance Issues

There is only one issue with purchasing tax deferred annuities over other investments like stocks and bonds, and that is the inheritance issue. Usually stocks, bonds, precious metals, and other investments can be passed on to an heir tax-free upon the owner’s death. Unfortunately, annuities are usually subject to the standard income tax when the new beneficiary begins to receive payments upon the owner’s death.

A good way around this is to simply not designate a future beneficiary so that upon your death, nobody is paid. The insurer will then charge a smaller premium since they aren’t promising to pay as much in the future, and you can use the savings on your premiums to set up another tax-free inheritance fund for your family.

With a weak U.S. dollar, United States exports become much more attractive to foreign buyers due to the decreased price. On the other hand, goods coming into the United States, do so at a higher price. While many argue that the weak dollar is hurting the economy, there are many arguing that it is helping, one way to take advantage of the weak dollar is by investing overseas. With the dollar being weak, the amount you earn in euros, yen or any other foreign currency, translate into a greater amount of U.S. dollars.

There’s no doubt that a weak U.S. dollar can truly hurt your portfolio and your income in terms of stocks, but what you need to do is turn that negative into a positive. Investing in domestic companies and stocks will lead to a loss of money and put a big dent in your portfolio, however, investing overseas and in foreign companies, will surely lead to an increase in your cash flow and a much happier you.

A few ways to ensure you minimize your losses is to first identify and estimate the amount of money you could potentially lose. How much money do you have invested in domestic companies? The next step is to eliminate as much of that potential for loss as possible. Get rid of all of the stocks you feel could lose you money, mainly the ones in the United States.

Many people are confused as to why investing in foreign countries while the U.S. dollar is weak, will help you save some money and increases your potential to earn money as well. The backing behind this idea is because when the U.S. dollar is weak, the products that the U.S. sell, are less expensive. This of course draws a large amount of attention and millions of yens, euros and other currencies flood into the United States. Due to the fact that other currencies are needed much more than the weakened U.S. dollar, you’re investments in foreign countries will pay off.

Regardless of how you view a weakened dollar be it a negative or a positive, the truth is, there is much to gain from a weakened currency, but if your finances are managed poorly, there is also very, very much to lose.

The individual or individuals who are responsible for implementing a mutual fund’s investing strategies and the management of portfolio and trading activities is known as a mutual fund manager or more simply, the fund manager. Additionally, mutual funds can be managed in a number of ways such as:

• by one person
• two persons or co-managers
• a team of three or more persons

Typically, fund managers are compensated by a fee which is oftentimes a percentage of that mutual fund’s managed average assets. In order to qualify for the position of fund manager, there are certain requirements including:

• high levels of both educational and professional credentials
• appropriate experience in investment management

Anytime you are considering investing in any mutual funds, you should always look for a long term, positive performance history and a fund manager whose track record mirrors the fund’s performance.

How to handle a change in fund managers

What most fledgling investors don’t realize is that the decision on investing in a particular mutual fund is to purchase the fund or the manager. That is the biggest challenge encountered when a mutual fund changes managers. Although this is not always the case, a change in fund management typically signifies a “red flag” and investors will need to put on their detective hats.

In most cases questions will need to be answered, answers will need to be deciphered, and a decision will need to be made regarding selling the fund or sticking with it. Naturally, it is simpler to stick with the fund manager since they have been responsible for some or possibly all of the fund’s performance. However, many fund companies will dictate a fund’s investment strategy and style, oftentimes demanding that the fund manager follows those mandates. This results in many transitions becoming relatively seamless.

In recent years, increasing numbers of fund companies have shut down the guru-making machinery which was their driving force in the 1990’s. Instead they are hiring management teams that may not be negatively or positively impacted by losing a single member. However, the departure of a fund manager is usually an indication or a warning and not so much an indication for you to sell off your fund.

What you want to remember is that a fund manager usually weighs the pros and cons when a top level executive departs a fund that is in their portfolio. So you need to be very critical and methodical as well as avoiding those knee-jerk reactions that you may regret later. Some things that you want to consider are:

• why the change in management was made
• if the transition was one that raised a lot of eyebrows or did it go smoothly?
• did the change equate to promoting a talented analyst or manager within that company?
• will that new manager make a positive difference in the performance of the fund?

In most instances, considering the above will help you in the decision making process.

The general or overall aspect of risk typically involves an expected value or outcome of a particular future event. Those values can be either negative or positive. The concept of risk is oftentimes generalized with unpredictability factors and focuses on failing to attain a positive benefit as well as the potential for harm (negative outcome) that exists. The risk concept itself becomes a bit more technical when you are discussing investment risk and the stock market.

The risk factor and the stock market

Taking the assurance of some type of return into consideration, there are only two types of investments – those that are riskless and those that are risky. The key difference is that riskless investments are guaranteed, whereas risky ones are not. However, always remember that the guarantee is only as valuable as the guarantor who makes it. Additionally, the only investments which are considered as being riskless are those that have been backed by the confidence and faith of a large national government that is stable.

Despite this, you still need to be aware of the fact that the risks of currencies devaluating based on inflationary trends is another form of investment risk which is most commonly referred to as “inflation risk.” Therefore, you cannot refer to any investment as being totally risk-free although it may be backed by what is currently a stable government. When all else fails, try to remember the cardinal rule that applies to investing in any financial instrument – never risk more money than what you can afford to lose.

Calculating investment risk

Part of the education phase of investing when you are just starting out involves learning how to calculate investment risk. Remember first and foremost that risk is an inherent factor with any type of investment, whether there is a no-risk guarantee or not. One of your greatest assets could very well turn out to be non-monetary but rather your ability to assess that investment risk so as to minimize it in your portfolio.

6 steps you can take to determine investment risk

There are a number of ways that you can educate yourself so that you can determine what the risk factors entail with numerous types of investments. Here are 6 steps you can take for how to determine risk in an investment:

1. Investigate the current conditions of the market – review investments that are considered to be risk-free

2. Look for rates of return that are close to what is desired

3. Take the anticipated return rate and deduct the baseline investment

4. Determine what the prior year’s return was on that investment – use the following formula –

“The total Return equals the Year-End Value minus the Year Start Value
plus the Dividends and divide that by the Year Start Value”

5. Compare the investment standards to the risk premium in order to calculate the potential ROI

6. Learn the correlation between the way in which risk compares the total loss of the principal investment to the actual type of investment involved