As a former Mutual Fund Investment Adviser, I have talked to thousands of people all across North America about Mutual Funds. Mutual Funds can be very complicated and overwhelming. This can prevent many people from investing in them, which will prevent their investment portfolios from reaching their full potential. Having a little bit of knowledge about these complex investments will ensure that you are not discouraged, and will also help you make sound investment decisions.
Here are the top 10 questions that I was asked, along with my responses:
1. What is a Mutual Fund?
A Mutual Fund is a pool of money that is used to invest in the stock market. For a person to properly invest in the stock market, they need a large amount of money that can be properly dispersed among many stocks to reduce risk and to take advantage of an average increase that takes place over a period of time. Most people cannot afford this, so Mutual Funds were created to pool their money together into one fund that is professionally managed for greater growth.
2. What is the MER, how does it affect my return?
MER stands for the term Management Expense Ratio. In short, this is the amount that is paid to the person that manages and invests the money in the pool. This is usually a percentage between 1 to 3 percent. Generally speaking, the more work the manager has to do, the more the MER will be.
3. Does the MER come out of my money?
The MER does not come out of your money. The percentage paid to the Fund Manager is taken off of the performance of the fund. For example, if you have a fund that makes 12% and the MER is 2%, then the performance of the fund would be listed at 10%.
4. Why should I invest in Mutual Funds?
Mutual Funds will increase your chances of making money while decreasing you chances of losing money. A good example of the decreased risk is comparing it to losing your wallet. If you have all of your money in one wallet and you lose it, all of your money is gone. If you have money in two wallets and you lose one of them, you still have half of your money left.
5. What are the different types of funds, which one’s are better?
There are three different types of Mutual Funds, savings funds, income funds, and growth funds. Savings funds are the lowest risk funds. The main goal of these funds is to make modest interest while preserving the investment. These funds are great for people who are investing for the short term, or have very little tolerance to risk.
Income funds mix a strategy of preserving capital while trying to create some growth. These investments are better for people who have some tolerance to risk and are investing for a longer period of time. Growth funds primarily try to increase capital, and take a “no pain, no gain” approach to investing. These investments can create great increases, but they are for long term investment by people that are very tolerant to risk. You do not have to worry too much about which one or one’s to pick. Investment Advisers are bound by law to ensure that the type of funds you are in match your needs.
6. Can I invest in a growth fund for a short period of time?
The simple answer to this is no. Many people try to invest in the funds that they think will make the most money for them despite the fact that it may be the most volatile fund around. High risk growth funds are meant for investing over a long period of time, and investing in them in the short term significantly increases your exposure to risk. Aside from that, the short-term risk is so high that the potential payoff is simply just not worth it.
7. Can I lose all of my money in Mutual Funds?
It is technically possible to lose all of you money, but the chances of that are slim to none. Having said that, I have seen many people lose very significant amounts of money. In the early part of the new millennium, many people were investing in technology funds. These funds seemed to be unstoppable. Eventually, investors realized that the stocks contained in these funds were not worth nearly as much as they were selling for. The values dropped like a rock. There was a technology Mutual Fund that was worth $70 a unit that dropped to around $7 a unit. That means that someone who had $10,000 invested in this fund eventually only had $1,000. This is an extreme example, but something to keep in mind when choosing high risk funds. Luckily this person had many other funds that cushioned his losses in this hard time.
8. Can I time the market?
No you cannot. Even the most seasoned investors cannot time the markets. Realistically, there is no way to know exactly what will happen in any short period of time. The one thing that we do know is that no matter what happens in the market in the short-term, the whole market always increases over the long-term. This is what you are counting on when you have a nicely balanced and diversified Mutual Fund portfolio.
9. Should I put all of my money in one investment? How do I know what investments I need?
You should have a nicely balanced portfolio that reflects your needs and goals in life. The best way to do this is by talking to a professional banker or investor. It is their job to ask you questions to uncover your needs and present you with the products and services that match those needs.
10. How do I avoid fees?
When it comes to Mutual Funds, it seems like there are always fees to be paid. Some of them are unavoidable, but some can be avoided. If you invest through a broker, you may get paid additional fees that you would not have to pay when you deal directly with an investment company. Try buying your bank’s funds directly from the bank. This can help avoid trailer fees and others that private brokers charge to make their money.