Skip to main content

Sound Advice: July 29, 2020

Fund Facts

Navigating the world of mutual funds can be an interesting adventure.  Indeed, for other than professionals (and probably for some of them), working one’s way through this forest of some 8,000 funds may be overwhelming.  Even so, here is some assistance in understanding.

Mutual funds have been around for decades.  They become popular in the 1970s and 1980s.  Fifty years ago, most funds were load funds.  Load is another word for sales charge.  Back then, it was not uncommon for load funds to have initial charges of 8% or so when making investments.  So on Day One, your $100,000 investment was worth only $92,000.

As time passed, investors became increasingly concerned about these sales charges.  Then several things happened.  The mutual fund companies created different classes of shares.  Typically, Class A included the stated load when the initial investment was made.  For investors who balked at that, they created Class B, which had no charge up front.  The hitch was that the charge was applied when shares were sold.  

Some folks were uncomfortable with either of these charges, which led to Class C.  Class C came with no front- or back-end charges.  It did, however, come with an annual fee.

All of these fees were in addition to the ongoing administrative and management fees, which were usually in the range of 1% to 2% per year.  These fees in aggregate were increasingly resisted and the universe of no-load (no sales charge) funds emerged.  Today, no-load funds are dominant.

In addition to the matter of fees, it’s important to be wary of duplication of underlying holdings. That’s especially true when considering the largest funds.  Why? Because as assets under management increase, fund managers have to focus on stocks that are actively traded, i.e., highly liquid.  They must buy huge positions.  For that reason, as the fund’s assets increase, the range of investment choices decreases.  It should come as no surprise, therefore, that there is considerable duplication of underlying holdings among the biggest funds.

Accordingly, it’s a good idea to avoid huge funds and concentrate on mid-sized funds.  Smaller funds may also be of interest, though one would be well advised to limit consideration to those with $100 million or more under management so that the fund’s expense ratio is within a reasonable range.

Pay attention also to the tenure of the fund’s manager.  Often, investors are tempted to concentrate on funds that have had the best returns in recent years.  This may not a wise approach.  What is wise is noting the tenure of the current fund manager.  If the manager has been aboard for an extended period, the fund’s record is that manager’s record.  But if it’s a new manager, it is essentially a new fund.

The task of sifting through the pile of fund information may be challenging, but these guidelines should help avoid mistakes that might otherwise be problematical.


N. Russell Wayne, CFP

www.soundasset.com
www.soundasset.blogspot.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: February 21, 2024

800-000-0000 That’s 800-000-0000 Again, 800-000-0000 That’s the typical closing for the hard sell commercials that are increasingly polluting media airwaves.   These are the commercials for products or services you rarely need or most definitely should avoid. A substantial number are on behalf of groups of attorneys who would have you believe that you and many others may be entitled to cash compensation for having used or being exposed to some evil item or substance some time in the last few decades.   The pitch always includes a comment that there’s no cost to you unless there is a settlement in your favor. Much of this is rubbish, but when the appeal suggests that there’s nothing to lose, why not take a shot.   And, as you would expect, “advisors” are standing by 24/7 to take your call and help get the process in motion.   What kind of advisor would be available at 3 a.m.? One version of this approach pops up every year between October 15 th and Decemb...
Post a Comment
Read more

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more