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YOUR MONEY, YOUR FUTURE
Mutual Funds: Criteria For Selection
Investing can and should be fun!! In
vesting should also be a long term goal.
It is often said that the key to successful
investing is not financial savvy, but
discipline and consistency. One must be
consistent in investing and not allow fluc
tuations in the stock market to send you
to the sidelines to watch. A downswing
in the stock market should signal an op
portunity to purchase more shares of a
stock or mutual fund, but not to bail out.
The beginning investor should start by
using the power of mutual funds. A
mutual fund is a collection of different
company stocks and bonds which allows
the small investor the ability to have in
stant diversification, professional
management, low management fees, li
quidity, small minimum purchases,
automatic reinvestment of dividends as
well as a wide variety of funds from
which to select.
Before selecting a desirable mutual
fund or mutual funds, the individual in
vestor needs to ask himself a few ques
tions to decide which mutual fund
category is best for him. The first ques
tion is: 1) What is your main objective?
The answer to this one is growth or
income.
Growth means that you will select
funds which invest in common stocks
with the goal of capturing high capital
gains. If growth is your objective, the
next question is in regards to your
tolerance for risk. Risk tolerance will be
either “high/moderate, low/moderate or
conservative. If your risk tolerance falls
into the high/moderate range then you
are more suitable for Aggressive Growth,
Capital Appreciation or Growth oriented
mutual funds. A low/moderate risk
tolerance means growth & income class
ification. Those who find that their risk
tolerance is very conservative should
choose suitable investments such as
Balanced mutual funds.
Income funds give investors a high
level of current income by investing in
the stock of companies with good divi
dend paying records. If income is your
main objective, then the next question
becomes: 2) When do you need your
principal or the initial amount invested?
The answer is either short-term or long
term. If the answer to this question is
short-term, then you will want to con
sider tax-exempt money market funds,
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regular money market funds, 90 day T-
bills or Certificates of Deposit. If the
answer to the. above question is long
term, then the investor should utilize in
vestment grade corporate bond funds,
tax-exempt municipal bond funds or
U.S. government bond funds.
Remember, that most investors who
are under the age of 45 will want to make
sure that 50% - 70% of their investments
fall into the Growth Category. A good
rule of thumb regarding growth oriented
investments, is to take your age and sub
tract from the number 100. So if you are
35 years old then 65% of your in
vestments should be in growth oriented
vehicles.
Once you have defined the type of
mutual fund that is best selected for you,
it is now time to ask the questions regar
ding the returns and other information
particulars of those particular funds.
1. Insure Investment objectives of the
fund match yours.
Always ask to receive the prospectus
of the mutual fund you are consider
ing. This will typically state the funds
objective or ask the representative
when you call.
2. What are the Fees?
Some mutual funds will charge what
is referred to as a sales charge of
load. Some loaded funds can charge
as much as 8% which means on a
$1000 investment only $920 go to
work for you. Also look at redemp
tion fees which are used when you
are selling or exchanging out of a
particular mutual fund. Expense
ratios are another aspect to examine,
for a stock mutual fund a rate of
1.5% is acceptable.
3. What Risks are you taking?
All funds but a money market fund
will expose you to market risk. But
this is not a reason to stay away from
other types of funds. Remembei that
a money market fund today only
gives a return of around 3%. The
average rate of inflation has been
3.1% from 1926-1992; this does not
include the tax which one will have
to pay on the interest earned. So you
see with a money market account
t
you could actually be losing ground.
4. Current Year-to-Date Return:
ie. (Jan. 1, 1994 - As close to today’s
date as possible)
5. One Year Annual Average Return:
ie: (April 8, 1993 - April 8, 1994)
In some cases, you may be given the
previous month’s ending date, ie
(March 31, 1993 - March 31, 1994)
6. 3 Year Annual Average Return:
ie: March 31, 1991 - March 31, 1994)
7. 5 Year Annual Average Return:
ie: March 31, 1989 - March 31,1994)
8. 1987 Annual Return:
(Just for the Year 1987). This is im
portant because 1987 was a very
poor year for the stock market. This
allows you to see how well the fund
can weather a market down-turn.
9. 1990 Annual Return:
(Just for the Year 1990). Same as
1987, another poor year for the stock
market.
10. Life of the Fund Annual Average
Return:
This will let you know, since the fund
started, what has been its average an
nual return.
11. How long the portfolio manager has
been with the particular fund?
Every mutual fund manager has a
different style of picking stocks and
investments, this could very easily
make a large difference.
Overall, asking these questions will
allow you to compare the historical
returns of the mutual funds you are con
sidering. The best indicator of the future
is the past, but there is no guarantee that
the mutual fund will continue to perform
at the same level. Next month we will
look at some of the more popular and
successful mutual fund families to invest
in and their individual funds.
If you have a question regarding your
personal finances, send to address below
and a response will be mailed to you.
C/O: Jeffrey Allen
YOUR MONEY, YOUR FUTURE
Allen Consulting Group
A Financial Advisory Company
6944 Shadow Ridge Lane
Stone Mountain, Georgia 30087
ZEBRA VOL. 2 ISSUE 8