Monday, November 25, 2013

How To Make Money Investing In Mutual Funds - Investing In Mutual Funds

By Frank Miller


Mutual funds have risen in popularity due to the fact that it is often considered by investors as a safe and effective means of generating money. A group of people or a company generally makes up a mutual fund and it is these people that handle the selling of the shares. When these investments are pooled together, they are then invested into a diversified selection of securities. In the end, you stand to gain your share of the money gained whilst minimizing the risks associated with investments.

The Sharpe ratio has long been used as a risk-to-return performance measure. The Sharpe ratio is computed by dividing the average excess return by the standard deviation of excess returns, where excess return is the actual return less the average T-Bill rate for the same period. The result is a measure of excess return per unit of risk. This is a very significant and useful statistic but it is not particularly intuitive to the average investor, who is accustomed to thinking in terms of actual returns. The Sharpe ratio is the best purely quantitative measure for comparing mutual funds, but for most investors, comparing risk-adjusted returns is a necessary step in the process, as it makes the comparison in terms with which they are familiar.

Many mutual funds, from big names to smaller funds, are now creating redemption fees if funds are sold within time periods much longer than what the SEC is suggesting. For example, some Vanguard international funds impose a 2% redemption fee if sold within 2 months. A few Vanguard mutual funds have a redemption fee of 1% for 5 years! Even if you plan on keeping your money in a mutual fund longer term you can still be impacted. For instance, the real-estate sector recently dropped 15-20% in just a few days. If you had invested in Cohen & Steers Realty Shares and wanted to protect your money by selling that fund, you would have had to pay an additional 2% redemption fee if it occurred within 1 year of purchase.

To produce a number that is intuitive and significant to the average investor, actual average return should be divided by the standard deviation of actual returns and the result then multiplied by the standard deviation of the actual returns of a relevant index for the same period of time. (A broad market index can be used in lieu of an index that is representative of the category but the result will be less relevant.) The result is a risk-adjusted return that is derived from and relates directly to published returns and is thus a more intuitive measure for the average investor. A mutual fund's risk-adjusted return is what a fund would have returned if its level of risk, as measured by the standard deviation of returns, was the same as that of the benchmark index.

The bottom line is that redemption fees cause you to lose flexibility. Let's say unexpected events, good or bad, cause you to need premature access to your money. Or maybe you just need to adjust your portfolio. Worse yet, what if we have another terrorist attack a few months down the road? These new fees mean you'll have to pay a penalty to access your money.

Lastly, investing with a mutual fund offers convenience and protection for you as an investor. You can sell your liquid assets quickly and easily through a mutual fund which means that you can earn and get your money in just a matter of days. You also do not stand to lose money to other shareholders since you possess certain rights being a shareholder yourself. Try investing in mutual funds and experience the ease and safety of investing.




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