According to an article in “personalcapital.com”, in 2011 “More than half of all American households own(ed) a mutual fund, and according to the Investment Company Institute, Mutual Fund assets in the U.S. totaled $11.6 trillion in over 7,600 funds” and “actively managed mutual funds made up over 90%.” (of the $ value of assets managed).
The article went on to explain that the reason actively managed mutual funds are so popular is that “they offer average investors professional management and an easy way to diversify” their savings and/or pension funds.
I hope you are still with me? My purpose in writing this brief article is to try to explain, in simple terms, what an actively managed mutual fund is, and to give you some statistics and information to help you make up your mind as to whether you should invest some of your hard-earned savings in one, and if so, which types of fund will best suit you – which will depend on what your personal goals and objectives for that specific investment might be.
Some managed funds are conservative, some are aggressive (i.e. a potentially greater return on investment (R.O.I), but higher risk).
Some are designed to produce regular ongoing income (dividends and interest income), whilst others invest for Capital Growth.
Disclaimer: This article is designed purely to provide the reader with general information about managed investment funds. It is not intended to provide investment advice. Please consult your financial advisor or bank for advice before making any investment decisions.
Ok let’s move on.
First, you need to understand what an actively managed mutual fund is
What is an Actively Managed Mutual Fund
According to “canstar.com”, an actively “managed fund involves pooling together money from different investors into one fund, that is invested and controlled by a professional investment manager” Most investment managers are employed by a financial institution – usually a bank or insurance company.
There are over 7,500 mutual funds in the USA alone, each with a different goal and objective. Some invest in bonds, some in stocks and shares. Some are what is known as balanced funds, i.e. they invest in both bonds, and stocks and shares, (According to Wikipedia “In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include government, municipal and corporate bonds).
As I indicated in the introduction, to pick a mutual fund that will be a good investment for you, you first need to define your investment goals and objectives; which will depend on what your personal goals and objectives for that specific investment, are, and how it fits in to your overall strategy.
So, if you’re not planning on using the funds you are investing for another purpose for a long time, you can focus on either long-term capital growth, or regular ongoing income (dividends and interest income). Most funds focus on one or the other, so that will determine which specific funds work best to meet your objectives.
If, on the other hand, if you plan to use the money for another purpose in the next few years, you’ll probably want to invest in a fund that enables you to withdraw your investment with a short period of notice (weeks or a few months), and with a focus on short term income.
The level of risk you are willing to take to get a potentially higher return is your personal decision. This will to an extent depend on the amount you plan to invest and the percentage that represents of your overall savings, pension or both. Common sense tells you that making a high risk investment of a million dollars is a much greater risk for someone that has $2 million to invest, than it is for someone with $10 million to invest.
How Mutual Funds Charge
All mutual funds charge fees (that’s how they make their money). The lower the investment fees and expenses you pay, the higher your returns will be. You can find a fund’s fee structure and rates by looking at the fund’s expense ratio (ie. annual percentage of the amount you invest), which in most countries, is required be disclosed in the funds’ prospectus – and can usually also be found online.
You’ll want a fund that has low fees (ideally less than 1%), Your time is better spent doing this type of research than trying to find funds that had the highest returns last year. Last year’s results are no indication of what might happen this year. You want a fund that consistently invests according to its goals and objectives and has low fees.
How to Find the Best Mutual Fund
You can do your own research, talk to your financial advisor, or one of the many companies that provide statistics and research on mutual funds. You should always ask financial advisors or companies providing recommendations whether they will make commissions on their recommendations. In some countries, this is illegal or has to be disclosed-but ask anyway. If they won’t disclose this to you, go elsewhere.
You need to understand the difference between active and passive funds. Put simply, actively managed mutual funds trade in and out of specific investments, while passive funds buy and hold a specific collection of securities. Although from year-to-year some actively managed funds outperform their passive counterparts, academic studies show that over the long-term, a group of passively managed funds generally outperform their actively managed peers.
The 2012 S&P Indices Versus Active Funds (SPIVA) Scorecard ranks the returns of actively mutual funds to passive S&P indices, and the results are clear. On a one-, three- and five-year basis, the S&P 500 outperformed 81%, 69%, and 62% of all domestic large cap mutual funds, respectively. The same trend is present across the mid and small cap spectrums.
In fact, no ten-year period exists where a majority of actively managed mutual funds outperformed their benchmarks.
Mutual Funds and Retirement
Retirement income funds are actively managed to be able to pay regular retirement income. They provide an all-in-one investment management solution, and offer more flexibility (but less guarantees) than annuities. Several mutual fund groups have created funds specifically for this purpose.
I think these are good options for someone in retirement who wants, and is able to manage their own financial affairs.
Most types of mutual funds can be a good choice in retirement if you chose them as part of a holistic retirement income plan, and know how and when to re-balance them (see link ion references below under Retirement) or sell shares as needed to generate the cash you’ll need to withdraw.
Mutual funds can be a good investment if you pick funds with low fees that match your goals and objectives.
As part of your overall savings and pension funds investment strategy, they provide a diverse, therefore relatively secure investment (subject to market crashes, which hurt everybody).
If you are someone who wants to maintain some form of ongoing active business interest into your retirement, to provide both an ongoing sense of purpose and an extra source of income to enable you to maintain your quality of life throughout your retirement years, the internet revolution has provided an infinite number of new opportunities.
I provided an overview of the most popular types of online opportunities in an earlier article. Click the link below to view that article.
This could be something you might want to consider as part of your overall retirement income strategy.
If you are like me, retirement is no longer the beginning of the end, its the beginning of a new and potentially exciting phase of your life.
I hope you will find this brief overview useful in seeing the big picture. This will be important if you decide to go into this more deeply. There are so many varying opportunities, and some brilliant marketing out there. So if your brain goes into overload just refer back to this basic overview to re calibrate it.
But please remember This article is designed purely to provide the reader with general information about managed investment funds. It is not intended to provide investment advice. Please consult your financial advisor or bank for advice before making any investment decisions.
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a division of DA Web Enterprises Pty Ltd
Last updated August 2017
Sources used in the preparation of this article:
The 10 Biggest Mutual Funds: performance analysis
Retirement and Mutual Funds