Funds, funds, funds, funds. The whirlwind of “funds” out there makes any new investor’s head spin. What’s right for me? What’s the difference between all of these funds? And what should I choose to get the most bang for my buck? We’ve taken two fund – managed market funds and index funds – and compared them, helping you decipher what is best for your portfolio.
Index funds are a type of mutual fund however, this type of mutual fund is not managed by a broker. Instead, the index fund is made up of a consistent group of securities in a given class of the market. The index – “being a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from different perspectives”.
An index fund investor believes that a manager working a managed mutual fund cannot outperform the index fund. Rob Isbitts gives a compelling comparison on the benefits of managed mutual funds and index funds. Basically, he suggests that while the index fund has outperformed managed mutual funds in the past, that is no longer the majority case. Rather, each fund has it’s merits and must be carefully considered by what the investor wants from his investments.
Managed Mutual Funds
Managed Mutual funds are a great investment for someone that wants to have a diverse portfolio, but doesn’t have the capital to invest in several different markets. A managed mutual fund allows for a person to invest in a wide range of markets because it leverages the buying power of a large group. Using the combined funds of many investors, the mutual fund is able to purchase substantial amounts of shares of a wide range of investments. Thus giving the investor a way to capitalize on a balanced portfolio.
These managed mutual funds are just as the name suggests: they are managed by a broker who watches the market, buying and selling on behalf of the investor.
There are more than 10,000 different mutual funds, yet each can be filed into one of three categories:
- Equity Funds (stocks)
- Fixed-income funds (bonds)
- Money market funds
Money Markets are a safe place to put your money for a short term investment period. Let’s say you wanted to save for something that was a year away: a trip, a wedding, or emergencies. This type of mutual funds is easy to set up – much like a savings account – and you are able to deposit or withdraw your money relatively quickly. As an added bonus, this money market mutual fund yields a higher return than a typical savings account., meaning your money makes money while you wait for your adventure to arrive. Money markets are suited to the small investor because they typically take less capital to open and they are the least volatile amongst the mutual fund category.
Income Funds are created with the intent to provide a steady return to investors. These funds are primarily made up of government and corporate debt, such as certificates of deposit treasury bonds, and prefered stock with a stated rate of return. A schedule and amount of return on investment is established at the beginning of the investment period meaning that the investor can count on the same cash amount coming to them on a recurring basis, “i.e” weekly, monthly, quarterly, yearly. This type of investment is great for retirees or anyone looking for a steady income from investments.
Equity(Stocks) make up the largest percentage of mutual funds. The investors in this fund type are looking for long-term capital growth. As the value of the purchased asset increases the equity grows against that which was paid for the asset. For example, Mr. B buys $100 worth of equity stocks from ABC corporation. Five years goes by and the value of his stocks are now worth $1000, thus giving Mr. B $900 in equity.
Its All About Diversification
Regardless of your choice of managed mutual funds or index funds, we are constantly reminded that the best portfolios are diversified portfolios. Along with your mutual fund selection, smart investors likewise keep part of their portfolio in the precious metals market, for as the markets change, precious metals remain a safe investment. Call us at Landmark Capital and allow us to answer any questions you have about gold, silver, or other precious metals.