wanted to begin the report with an explanation of what mutual funds are and the
different types and classifications that are available. Mutual funds pool the
money of many investors to invest in a variety of securities. Mutual funds are
an excellent choice for an investment option because of professional management
are many types of mutual stock funds. This report will summarize several major
fund categories then provide a recommendation that I feel will best suit your
Aggressive Growth Funds-
as the name would suggest, an aggressive growth fund seeks rapid growth and are
subject to dramatic increases. A possible disadvantage for this type of fund is
that investors experience wide price swings due to the speculator nature of this
type of fund.
Equity Income Fund-
Equity income funds primary objective is to provide income to its shareholders
through the payment of dividends. Equity income funds make a good investment
choice for retired or conservative investors.
Global Stock Funds-
Global stock funds invest in stocks of companies globally including the U.S.
Growth funds invest in large well-established companies that expect higher than
average revenue and earnings growth. Growth funds are similar to aggressive
growth funds but are less volatile.
Index funds invest in index companies like NASDAQ 100 index and Standard and Poor’s
500 Stock Index and should provide about the same performance. An advantage of
index funds is that they are cheaper to manage and often have lower management
fees and expense ratios.
International Funds invest in funds internationally outside of the U.S. and could
earn profits in economies that are performing the best.
Large-cap Funds- Large-Cap
Funds invest in stocks of companies that are stable, well-established and have
a capitalization of $8 billion or more.
Mid-Cap Funds invest in stocks of companied that are more secure than large or small
growth companies and have a total capitalization of $1 to $8 billion.
Small-cap Funds invest in stocks of companies that are smaller, innovative, and
offer higher growth potential. These funds invest in companies that possess a
total capitalization of less than $1 billion.
funds that are newer and more specialized include Regional Funds, Sector Funds,
and Socially Responsible Funds are also available and can be discussed further
if you have an interest.
Funds are another avenue for investment. A Bond Fund is a mutual find that holds
a lot of bond issues and is a fixed income investment. Investments may include
government, corporate, municipal and convertible bonds, along with other debt
securities like mortgage-backed securities. A few of the most discussed Bond Funds
High-yield bond funds –
(often referred to as JUNK bonds) which invest in high-yield, high risk
Intermediate U.S. Bond Funds -invest
in U.S. Treasury securities with maturities between 3 and 10 years.
Long-term U.S. Bond Funds-
invest in U.S. Treasury securities with maturities in excess of 10 years.
Municipal Bond Funds-
provide investors with tax free interest income from investments in municipal
bond funds available provide investments in funds with maturities between 3 and
10 years as well as World Bond Funds which are offered by foreign companies and
There is a class of funds
that fall under “Other” which include Asset allocation funds, balanced funds,
funds of funds, life-cycle funds, and money market funds which invest in
certificates of deposit, government securities, and other highly liquid investments.
is important that you understand the difference between load and no-load before
starting this process. A mutual fund load is a fee charged for the purchase or sale
of a mutual fund. Funds that charge loads are generally referred to as “load
funds” and funds that do not charge are called “no-load funds”. Front end loads
charge loads at the time of purchase and back-end loads or “contingent deferred
sales charge” are charged at the time of the sale.
expressed the desire to enlist a professional advisor or team to assist you
with your investments. Be sure to evaluate the company, individual, as well as
the portfolio they manage. Morningstar, a leading resource for investment information
in the industry suggests that you review the 5 P’s or areas that will assist
you in identifying your team and holdings for your portfolio. The first “P” is
performance. Evaluating how a fund performs over a certain period (several years)
and during extreme market conditions will give you an idea of how it may
perform in the future. The second “P” is for Process. What process do the
managers follow and does their strategies align with yours. The third and
fourth “P” is for People and Parent. You should give consideration to the team running
the fund as well as the parent funds behavior. Examining the parent funds company’s
behavior can help you determine if it is a good steward of investor capital. The
final “P” is Price. Price is one of the best predictors of returns. Determine
whether the fund is sharing its economies of scale with its investors.
fund that I would recommend based on an initial investment of $50,000, a current
annual household income of $80,000 and your current tax bracket of 15% is the
American Century Equity Income Fund (TWEIX). This is a no-load fund that falls
in the low risk category. The fund has total assets of $12.6 billion as of
December 8, 2017 which puts this fund in the Large Value category (Quoted by
Morningstar). The minimum investment for this fund is $2500.00 and has management
fees in the average range at an expense ratio 0.93%. Morningstar reports that the
management of the fund “follows a disciplined process focused on dividend-paying
stocks with healthy balance sheets”, and grades their stewardship at a premium
level. The asset allocation for the fund shows diversity with a breakdown as of
US stock 72.04%
Non-US Stock 7.13%
This fund has performed
very well even during extreme market conditions. American Century Equity Income
Fund lost 20% in 2008 which is less than almost every other fund in the
category that year according to Morningstar, compared to the S&P 500 which
lost 37% that same year. While this fund does not show a history of historic
gains in a year it has a stable performance history and strong stock market
returns over a trailing five-year period. American Century Equity Income Fund
has a 1-day total return of 0.31% as of December 8, 2017, so based on a $50,000
initial investment could return a total of $56,575 balance after one year or $104,
455 after 10 years with a $82,790.00 after tax future value. I feel you should
continue to put $200 into a savings account that could be more easily
accessible for emergencies or potential debt reduction however, if an additional
$200 could be invested each month or $2400 a year.
The first step to get started in investing in mutual
funds is to review the information presented and set goals for your portfolio.
Things to consider are how long you plan to invest and what your specific goals
are during that time frame. Will you need money for someone’s education or are
you strictly planning for retirement? Do you plan to manage the fund yourself
or hire a company to manage it for you? Is there a set dollar goal you would
like to meet and when? This
report presents a general overview of mutual funds featuring one specific fund.
There are many options available to you depending on your goals. Once your
goals have been established you can begin to create a road map for building