Wealth Management Archives - Page 2 of 4

The average household in Britain has over £15,000 in debt. You may think to yourself, well I’m not out £15,000. There’s no way I’d ever accumulate that much debt.

Debt is often connected to large purchases like homes, automobiles, or student loans. We know about that debt. We are prepared for it.

But the debt that creeps up over time is the trickiest. A little bit here, a little bit there seems fine. Before you know it, though, you’ve matched that £15,000 and then some.

Don’t let small mistakes in your financial planning lead to big debt. Check your habits against the following seven mistakes that we see most often. Read through for tips on how to avoid them and what habits to adopt instead.

1. Putting Your Emergency Fund on Hold

One of the most common financial planning mistakes is not having an emergency fund. This is enough money to cover your basic expenses for at least three to six months.

Maybe you’re in school or working your minimum-wage first job out of university. Saving what you can, even if it’s £20 a month, makes a difference.

But over the course of a four-year degree, that £20 a month grows to nearly £1,000. And that doesn’t include interest earned from your bank!

You may be out of school and established in your career. If you do not have an emergency fund, you need to start one as soon as possible.

Begin by sorting out how much money would cover six months of expenses (Netflix or Amazon do not count). Divide that number by how many months you can take saving up for it.

Once you have a plan, get your first payment into a bank account with a decent APY.

2. Paying Down Debt Without Saving

You may not have an emergency fund because you’re paying off student loans. You aren’t alone! In fact, in England, 1.3 million students receive financial aid each year.

But it’s imperative to keep saving even as you pay off your debt.

Loans often come with steeper interest rates. So your best course of action is to make larger payments against your debt upfront. In tandem, make smaller payments toward your savings.

Once you’re debt-free, you can save faster. Consider saving the same amount you were using to pay off your debt each month. After all, you’ve already practised not using that money for other things.

3. Not Saving for Taxes

Smart financial planning accounts for every expense, and that includes taxes! You try to think of everything: the mortgage, the kids’ education, daycare, pet care, investments, retirement. It’s easier to forget about taxes while planning your finances because they come up only once a year.

When you do get your tax return, you don’t want to find yourself pulling from your savings account. Average the taxes you paid over the last five years and divide that by 12. That’s the minimum amount you should be putting away each month for your taxes.

If you are in Australia, take a look at Sydney’s dedicated SMSF advisers for advice.

4. Not Budgeting for One-Time Expenses

Alright, so you’ve made an emergency fund, you’ve paid off your debt and you’ve budgeted for taxes. Well done, you! Next, we’re going to consider the other annual, one-time expenses you may not be considering.

For example, one annual event, in particular, comes around the same time every year in December. You may recall a lot of expenses associated with it: ribbon, wrapping, gifts and cards. We’re talking, of course, about Christmas.

It could be Christmas, Hanukkah or your child’s birthday party. Either way, make sure you add these one-off expenses to your budget. Think of it this way: a budget is also a great way to keep from overspending during the next holiday season.

5. Living Beyond Your Means

Speaking of overspending, that’s one of the easiest financial planning mistakes to make. Here’s where your consumer debt can creep up on you over time.

It starts with one handbag that’s just a little over your price range. Or a fantastic deal on that new teapot online even though you really don’t need a new teapot. It could even be buying your morning coffee at the cafe instead of making it at home.

These £5, £10, £15 splurges here and there may not seem like much, and they aren’t if they’re one-time-only purchases. But over days, weeks and months, you’re subtracting hundreds of pounds from your budget.

If you want to be able to splurge now and then, add it to your budget. Put away a few pounds a week and treat yourself to a fancy cafe treat once a month. Save up for that nice handbag or decide whether you can live with the teapot you already have.

6. Not Diversifying Your Investments

If you’re not investing (and you don’t have heaps of debt to pay down), you should start. It’s the best way to see your money grow over the long run.

But one mistake we see with new investors is not diversifying their investments. What this means is putting all your money into one kind of industry. For example, investing everything you can into real estate investments.

This isn’t a wise way to invest because it leaves you at a higher risk. If the real estate market drops, you’ll suffer a greater loss than if you’d diversified. If you’d invested in real estate as well as lumber, technology and food, for instance.

If you’re not sure whether you’ve diversified your accounts, speak with your bank or an advisor. They’ll be able to offer suggestions on ways to improve your profile.

7. Ignoring Your Company’s Retirement Plans

And while we’re on investments, let’s talk about saving for retirement. Even if you’re in your twenties or thirties, you should be contributing to a retirement plan.

Thankfully, many companies offer retirement savings plans to their employees. These plans usually take a portion of your paycheck and put it into your retirement account. Sometimes, companies will even match your contributions up to a certain number.

Either way, it’s worth looking into! It saves you from spending that extra money and gives you an added incentive to save.

Strategies for Financial Planning

Organizing your finances may not be the most glamorous undertaking, but it is a critical one. Use these financial planning tips to help you navigate your finances with confidence.

And if you’re curious about getting started with a financial advisor, check out this article.

Investment Management

8 Essential Money Management Tips for 2021

ByCFI.co

Money: it makes the world go ’round. Not only do we need it to pay bills and buy groceries but to send our kids to college and eventually retire.

The trouble with money, however, is that it’s difficult to manage. We spend it so frequently and on so many different things that we can have issues maximising its usefulness.

This is why it’s important for you to brush up on your money management skills. Need a little help with the matter? Then read on because here are eight essential money management tips for 2021.

1. Establish a Budget

The first thing you should do is establish a budget. This will help you see where your money is going and how much money is left over after you’ve paid all of your necessary expenses. Necessary expenses include rent, utilities, taxes, insurance premiums, groceries, gas, and the like (things that you have to pay for in order to survive).

To create your budget, we advise you to use either a phone app or an online spreadsheet. There are all sorts of budgeting apps out there, including Mint and Personal Capital, to name just two.

Use these apps to write down the name of each expense as well as the amount of money that you need to allocate to each of them. This will show you how much spare money you’re working with each month, helping you to realise new ways of spending your disposable income.

2. Track All Spending

In addition to creating a budget, you should also track all of your expenses. This includes non-necessary expenses as well as necessary expenses. Non-necessary expenses include but aren’t limited to money spent on hobbies, money spent eating out, money put in savings accounts, and the like.

Only by tracking these expenses can you know whether or not you’re over or underspending in a particular area. For instance, you might find that you’re spending too much on fast food and too little on your retirement contributions.

If you don’t track your spending, you become susceptible to making an excess of frivolous purchases. These purchases will provide you with a feeling of quick gratification but will hurt your financial standing in the long-run.

3. Save for Emergencies

Life is unpredictable. Rarely do things go to plan. Whether it’s a perfectly good furnace that stops working in the dead of winter or an automobile that gets sideswiped by an aggressive driver, emergencies do occur.

What’s important is that we have the money saved up to help us get through these emergencies. If we don’t have this money, we’re forced to turn to credit cards, and once we turn to credit cards, we start sinking further and further into debt.

This is why, every month or so, you should be putting some of your money into an emergency fund savings account. Generally speaking, it’s wise for your emergency fund to equal 3 to 6 months of your average monthly expenses.

4. Contribute to a Retirement Fund

You don’t want to have to work for the rest of your life. In fact, if you’re like many people living on this planet, health issues will eventually prevent you from doing so. This is why you need to contribute to a retirement fund.

Generally speaking, it’s wise to contribute 10% to 20% of your income to retirement, year in and year out.

5. Take Advantage of Multiple Accounts

One of the reasons that some individuals have trouble managing money is that all of their money exists within the same bank account. As a result, they end up spending money that they would have used for other purposes. For instance, instead of using the money for future healthcare expenses, they end up spending it on fast food.

How do you get past this problem? The answer is to take advantage of multiple bank accounts. This way, you can separate everyday spending money, emergency savings money, healthcare savings money, and otherwise.

6. Set Goals

You should always have financial goals that you’re working towards. Whether this is buying real estate, purchasing a car, stashing money away for retirement, or otherwise, setting goals can help to keep you on the straight and narrow.

If you don’t set goals for yourself, you’re likely to spend money on hollow purchases. For instance, you might overindulge in food or alcohol or musical performances, or athletic events.

7. Pay Off Debt Strategically

If you’re like many people on this planet, you have debt to pay off. This could be credit card debt, student loan debt, a mortgage, an auto loan, or otherwise. In any case, you should pay it off as strategically as possible.

First, see if you can get any of your interest rates reduced. You might be able to refinance with a different lender or you might be able to talk down one of your current lenders. It’s possible and certainly worth a try.

Next, establish a debt payoff plan. We recommend attacking the high-interest debt first. While doing so, just be sure to pay the minimums on your other loans.

The reason for doing this is to eliminate some of your interest burdens. The quicker you pay off the principal, the less interest you’ll have levied against you.

8. Set Some Money Aside for Fun

While you don’t want to spend all of your disposable income on non-necessary expenses, you should still spend some of it on them. After all, if you’re not having fun in life, you’re barely living in the first place.

It’s often recommended that you set aside 30% of your income for fun money. However, this isn’t manageable for everyone. Meet your savings goals first, and then budget for fun.

Need More Help With Money Management?

Money management isn’t an easy matter. It can take a lot of research and a lot of practice. If you need assistance with it, our website can help.

We have articles on everything from business to economics to hedge funds to insurance and more. If you’re looking to brush up on your financial expertise, this is the place to be.

Browse more of our money management strategies now!

Lifestyle

South Africa as a HNWI Aestination

ByCFI.co Blogger

New World Wealth in collaboration with Steyn City recently reviewed the top factors that attract HNWIs to South Africa.

Notably, South Africa is home to over twice as many millionaires (HNWIs) as any other African country. The country ranks 30th in the world by this measure, ahead of major economies such as Greece, Portugal and Turkey. Currently, there are just over 35,000 HNWIs living in SA (as at Sept 2020).

Things that attract HNWIs to SA include:

Lifestyle aspects: weather, beaches and scenery.
A large free media which helps disseminate reliable information to investors. This sets South Africa apart from most other emerging markets worldwide.
One of the 20 biggest stock exchanges in the world (by market cap).
A well-developed banking system and large fund management sector.
Hub for doing business in the rest of Africa.
Luxury food stores such as Woolworths, which appeal to wealthy consumers.
Exclusive areas such as Umhlanga Rocks and the Atlantic Seaboard in Cape Town.
Top-end estates and apartments. SA is a global pioneer in estate living and is home to many of the world’s best lifestyle estates. New World Wealth estimates that over 45% of SA HNWIs either live or have homes on estates. An additional 30% have homes in luxury apartment blocks (which have been the fastest growing residential segment in SA over the past 20 years in terms of price growth).
Good transport infrastructure.
World-class shopping centres such as: Gateway, Sandton City and the V&A Waterfront.

SA wealth stats (for Sept 2020)

There are approximately 680,000 mass affluent individuals living in SA, each with net assets of US$100,000 or more.
There are approximately 35,000 millionaires (HNWIs) living in SA, each with net assets of US$1 million or more. Most of these HNWIs are based in Johannesburg (Sandton especially), Cape Town, Umhlanga and Pretoria.
There are approximately 1,800 multi-millionaires living in SA, each with net assets of US$10 million or more.
There are 86 centi-millionaires living in SA, each with net assets of US$100 million or more.
There are 5 billionaires living in SA, each with net assets of US$1 billion or more.

Note: “Wealth” refers to the net assets of a person. It includes all their assets (property, cash, equities, business interests) less any liabilities.

About Steyn City

Steyn City is a luxury residential parkland residence situated north of Fourways in Johannesburg. The lifestyle resort features over 2,000 acres of indigenous parkland, ensuring that every resident has a sprawling back garden to explore.

Steyn City residents have access to a wide array of amenities and world-class facilities, which include kilometers of running and cycling track, outdoor yoga centres, a fully equipped gym, resort pools, aquatic centre, several restaurants, a world class equestrian centre and Jack Nicklaus championship golf course with award-winning clubhouse. Added to this, the development offers a forward-thinking educational campus and outstanding office premises.

All of this makes Steyn City an obvious choice for people relocating to South Africa. The development offers all that a family or even executive could possibly need, from excellent infrastructure to a highly esteemed school – all within a safe and secure setting.

At a time when many people are reconsidering their location, now that remote working means they are no longer bound to an address close to their workplace, Steyn City stands out as a destination that makes it possible for residents to enjoy vacation-style tranquility, just minutes from the city.

Investment Management

Investing in the Good: The Impressive Rise of Impact Investing

ByCFI.co

Societal issues continue to get the media’s attention as many people take the fight a notch higher for a better society. But it’s all for a good cause because society starts to see good changes taking place.

As usual, investors want to be part of the change. They’re now focusing their efforts on opportunities geared towards supporting social goals. This is where social impact investing comes in.

Business is no longer all about making financial gains. It now involves environmental and social impact with its actions. Yes, investing is growing financial returns but for more noble causes such as the betterment of society.

Read this article and understand everything you need to know about global network impact investing and why it’s growing so fast. Let’s get started.

Understanding Social Impact Investing

If you’re new to this concept, it can be quite complex. Any information on the subject only gives rise to more questions. You can blame this on insufficient data available on the subject matter. There is not much information concerning impact investing and its profitability to either the investor or society.

But then, what exactly is impact investing?

Impact investing simply means unleashing the power of capital for everyone’s good. The main goal of this kind of investment is to generate positive social and environmental impact as well as make some financial returns.

Don’t get it confused with charity donations and social foundations. While both are geared towards helping society, impact investing is more of a win-win situation.

Impact investment focuses on helping society make some capital through your business. The capital would then address some challenges in society. Both the investor and society benefit in equal measures.

The funds usually go to noble causes such as renewable energy, environmental conservation, sustainable agriculture, and accessibility of basic services like education, housing, and healthcare. Anything deemed helpful to the environment and society calls for impact investing.

The Growth of Impact

The idea of investing with intentions beyond financial returns isn’t a new concept. There are many faith-based organizations working in accordance with their values of a better society. Catholic and Islamic organizations started this kind of investing a long time ago, and it looks like it’s not going anywhere.

The only thing that makes this intentional investing look like a new concept is that it has been known for a very long time as corporate social responsibility, sustainable investing, or socially responsible investing.

Companies have measured their performance not only on financial lines but also on how they perform along the lines of social, environmental, and corporate impact. The performance is more focused on these dimensions and how the company aligns with its values and social goals.

The type of investing is often referred to as a ‘double bottom line.’ The organization focuses on financial goals as well as its environmental and social impact. All these are aligned with their sustainable development goals.

A Growing Focus for Investors

While this kind of investing is still at its infancy stages, many global investors are continuously getting involved. Companies are coming up with their own impacting investing funds. It seems like something very lucrative in the business world as well as a noble course in society.

The Global Impact Investors Network (GIIN) estimates up to $228 billion in assets associated with impact investing firms. The figures show that this sector of the economy has been seeing tremendous growth over the past years.

Impact Investment Returns

As usual, no one wants to buy a dying horse. So, is impact investing really profitable? This is a question that many financial consultants have had to deal with many times. Of course, any serious investor will ask this question before making any kind of investment regardless of how noble it looks.

Some business people have subscribed to a common misconception that any double-edged business is doomed to fail. By this, they mean that any business that focuses on social impact and financial return will yield low returns.

Some researchers have strongly disputed this belief. They have proven that anything that is good for the environment and society is good for business. Others have proven the existence of a good relationship between investing in social, environmental, and governance with corporate financial performance.

There is a lot of evidence proving that impact investing is profitable to both the society and the organization.

Impact Investing Challenges

Like any other business, impact investing has its own share of challenges. It’s crucial to understand the challenges that come with any kind of investing and prepare for the risks involved.

This kind of business is also subject to the rules of the marketplace. The first challenge with impact is the difficulty in finding companies that meet the stringent requirement and still stick to the market rate of return.

Many businesses fail to meet all these two goals. The few that manage have to go extra miles to use additional resources and deal with great risks. You should trust your financial advisor to give you a better explanation of the challenges and the risks associated with social impact investing.

The Growth If Yet to Come

From the look of things, impact investing will continue to grow, and in the years to come, it will be the trend in the business world. The kind of investment has gained traction in the eyes of investors, and that’s all it needs to see success.

However, the future of this kind of business depends on the understanding that people will have on it. Everyone must learn to differentiate it from the philanthropic way of charity giving. You must understand that charity is no longer the only way to make a difference in society.

Now you have some knowledge of impact investment even though the concept is still complicated. Do you want to learn more about issues regarding investment, running a business, and managing your finances? Feel free to view our website for more educational blogs like this one.

Corporate Finance

The perfect storm brewing for company pensions

ByCFI.co Blogger

Company pensions are becoming increasingly unsustainable due to the plunge in government bond yields and low interest rates, warns the CEO of one of the world’s largest financial advisory and fintech organisations.

The warning from Nigel Green comes as the yields of government securities – in which pension funds heavily invest – have fallen dramatically since the coronavirus crisis.

Mr Green says: “Institutional investors, such as pension funds, have always traditionally invested in government bonds, as they’re widely regarded as a safe-haven.

“However, the world has changed considerably in six months.

“Around the world, government bond yields are plunging as a direct result of the record-breaking asset purchase schemes introduced by central banks to help ease a severe worldwide economic slump due to the pandemic.

“And as the historic stimulus is set to remain, or even be expanded, the pressure on bond yields is expected to intensify.”

He continues: “The far-reaching stimulus agendas and more than a decade of ultra-low interest rates – which could be going even lower – are creating a perfect storm for company pensions, which are already feeling the squeeze of ballooning deficits.

“Increasingly, no longer are government bonds delivering the returns required to fulfil the obligations made to retirement savers.”

The deVere CEO also underscores the ongoing issues of the wider bond market.

“The falling yields have forced pension funds, and other institutional investors, to make highly unusual changes to their asset allocation mix as they seek out better returns in riskier assets.

“But then, the question is: If pension funds don’t buy government bonds, who will?

“China has been a major purchaser of U.S. bonds in the past to keep its export prices down. With its $1trn of Treasurys it’s the number two holder.

“But the new economic realities and geopolitical tensions have prompted Beijing to shed some of its U.S. bonds. In March alone, China sold $8bn of its hoard – in the same month as overseas investors and central banks got rid of $300 billion of Treasurys to raise dollars.”

Mr Green concludes: “Typically, bonds account for more than half of the assets held by pension schemes.

“Due to the falling bond yields, the potential for negative interest rates, and the already chronic deficits, company pension holders should seek with their adviser the available ways to safeguard their retirement income.”

Economics

Investors buoyed by extra U.S. stimulus to support recovery

ByCFI.co Blogger

Investors who have been “paying attention” have been topping–up their investment portfolios and will continue to do so, says the CEO of one of the world’s largest independent financial advisory and fintech organisations.

The comments from Nigel Green, the chief executive and founder of deVere Group, which has $12bn under advisement, come as stock markets around the world further rallied on Tuesday after the U.S. Federal Reserve announced an expansion to its historic stimulus programme.

Mr Green affirms: “Global stocks have been buoyed by the news from the Fed – the world’s de facto central bank – to buy individual corporate bonds in addition to the exchange-traded funds it is already purchasing, to support the world’s largest economy.

“This extra stimulus acts as a ‘backstop’ or ‘floor’ for equities.

“The additional Fed support was widely expected by the markets and therefore, investors who have been paying attention have been topping-up their investment portfolios recently as entry points will inevitably continue to go higher as we move forward.”

He continues: “It is likely that savvy investors will continue to enhance portfolios as the backing is likely to be maintained for years, not quarters.

“Also, it has been reported that President Donald Trump’s administration is preparing to unveil a $1 trillion infrastructure package. This will further boost asset prices.”

The deVere boss called the additional measures last week.

He noted on Thursday June 11: “Further stimulus can be expected from the Fed – and also perhaps from Congress too – in the near future… This will support and likely boost asset prices moving forward. Investors will now be eyeing the opportunities before any fresh or enhanced stimulus packages are announced.”

London’s FTSE 100 and Frankfurt’s Dax both jumped 2.2% in morning trading on Tuesday, the pan-European Euro Stoxx 600 gained 2%. U.S. futures markets suggested that U.S. stocks would rise further when trading begins on Wall Street, with S&P 500 futures up 1%.

In Asia-Pacific, Tokyo’s Topix shot up 4% and Australia’s S&P/ASX 200 gained 3.9%. Meanwhile, Hong Kong’s Hang Seng rose 2.4% while China’s CSI 300 index was 1.5% higher.

Nigel Green concludes: “Few things can fuel markets like another stimulus injection.

“The message investors are taking away is that the U.S. central bank and government are prepared to do whatever it takes to support the recovery.”

Wealth Management

How Do Mutual Funds Work? The Complete Guide to Mutual Funds

ByCFI.co

Are you a long-view investor with an interest in seeing your wealth grow over 10, 20, or 30 years? If the answer is yes, then you need a diverse portfolio of assets to help you achieve your goals.

One of these assets is a mutual fund. Mutual funds are a collection of assets grouped together according to an investment strategy and run by a fund manager. Compared to individual securities, mutual funds provide a certain level of protection against the volatility of the stock market and still deliver steady returns for investors.

How do mutual funds work? Keep reading for a quick primer.

What Are Mutual Funds?

Mutual funds are called investment baskets. Rather than being one form of security or investment on their own, mutual funds are a container for a group of different types of investments, usually stocks, bonds, or a combination of the two. However, they can contain other types of investments. The primary types of mutual funds include:

Equity funds
Bond funds
Balanced funds (equities and bonds)
Money market funds
Fixed-income funds

When you invest in a mutual fund, you invest in the basket of investments rather than a single stock or share. You also pool your money with all the other fund investors, which grants you access to investments that aren’t available to the average solo investor.

How Do Mutual Funds Work?

A mutual fund has a fund manager, who oversees the fund and chooses the investments found within it. The manager may choose to actively or passively manage the fund according to a set strategy or according to the manager’s whims.

Many mutual funds are increasingly passively managed because research shows that passive investments earn better returns compared to actively managed investments. It’s rare for active investment strategies to outperform the market.

How does the mutual fund make money? It depends on the type of fund you choose. When your investment earns you returns, it comes in the following forms:

Income earned via dividends
Growth in price of securities or capital gains
Fund share price (net asset value) grows

You’ll also pay fees for your mutual fund. These include the cost of the fund (e.g., administration and operating costs) and sales commissions. Keep in mind that these fees are typical percentages of the fund, and you’ll pay them annually. A fraction of a percent can be the equivalent of thousands of dollars.

The fees you pay depend on the structure of your fund. It pays to research the type of fund that best suits your financial goals and to compare fees between funds and fund providers.

Why Choose a Mutual Fund?

Mutual funds are increasingly popular because they offer even the novice investor something that the pros could only covet a few years ago: a diversified portfolio. Because you invest in a basket of investments, your profits and losses aren’t solely tied to one company’s performance. Diversity means you have a lower risk of losing everything if a stock performs badly.

Another reason investors of all types choose mutual funds is that they come with a fund manager. You don’t have to actively trade them or even worry about all the investments inside the basket. You pay the investor a fraction of a percent of the value of your account to worry about that for you.

By working this way, mutual funds use a high volume of transactions to reduce the cost for you as an individual investor. Rather than paying as much as $5 a transaction, you split the bill with other investors.

Are There Disadvantages of a Mutual Fund?

Mutual funds do come with disadvantages compared to other types of funds like exchange-traded funds (ETFs).

The biggest issue that investors find with mutual funds is that they can be expensive. Typically, mutual funds become very expensive with a small investment and then again at the top of the scale. Many providers offer the best rates to those with mid-size accounts.

Another issue with mutual funds is that they can be inefficient compared to ETFs. Efficiency applies both to tax efficiency and the cost of maintaining the fund vs. the returns it offers. ETFs generate fewer capital gains distributions, and they have their own way of buying and selling that triggers less taxable income. However, you may find that some passively managed mutual funds are also tax efficient if only because they generate fewer transactions.

How to Find the Right Mutual Fund

Although there’s a shortlist of widely popular mutual funds, a fund’s popularity doesn’t necessarily mean it’s right for you.

Finding the right mutual fund requires you to find a fund that meets both your financial goals and your risk tolerance as well as a philosophy that reflects your own investment philosophy.

From there, you can start to consider the costs of the fund and the management style to whittle down your list of contenders and begin investing.

Use our guide to choosing the best performing mutual funds to get started.

Are Mutual Funds Right for You?

How do mutual funds work? They pool investors’ money together in a basket of securities to provide long-term growth with some protection from market volatility.

Mutual funds are a diverse group of investment tools, but almost every investor can see some benefit in adding top-performing funds to their portfolios. The trick is to find the fund that best matches your personal goals and your investment philosophy and strategy.

Looking for more investment content? Visit our Finance archive for the latest news.

Wealth Management

What Are the Types of Mutual Funds?

ByCFI.co

When one wants to build their capital, the stock market is often the first port of call. But investing in the stock market is often not worth the stress. In the worst of times, investing in stocks have bankrupted investors.

You wish to invest your money but are frightened that you may lose it all. With the financial crises that we have collectively experienced, one is right to be hesitant.

Fortunately, there is an alternative option. Mutual funds are a great avenue for investors.

But with all the different types of mutual funds available, we cannot blame one for feeling puzzled as to which ones to invest in.

While we aren’t here to advise you, we can explain the different types of mutual funds so you can make a better decision on where to invest.

The Guide to Types of Mutual Funds

A mutual fund is a fund created when a plethora of investors put in their money in securities, bonds, money market instruments, and a variety of other assets.

This pool of money is what you would invest in. The mutual fund is controlled by a money manager who attempts to produce capital gains income for the investors.

We suggest seeking the aid of a financial consultant when deciding to invest.

Here are the different types of mutual funds for you to consider:

1. Equity Funds

Also known as stock funds, this is the most popular type of mutual fund. Equity funds will have different subcategories. These can include subcategories based on the size of the company (large, mid-size, small) or the type of company (tech, finance, etc.)

There are also equity funds defined by their approach—this can include aggressive growth, slow growth, or income-oriented.

To choose the best equity fund, you want to look at the subcategory as well as the investment approach. For example, you may wish to invest in a technology equity fund that has aggressive growth.

2. Fixed-Income Funds

This type of mutual fund offers a set rate of return. These include government bonds and corporate bonds. The mutual fund will generate income which is how the investors earn.

The money manager usually focuses on bonds that are undervalued. They purchase these bonds and then focus on selling them to make a profit. They can be risky as one can never guarantee the outcome or value of the bonds.

There is also the issue of the interest rate risk—which means that the value of the bonds will decrease if interest rates increase. On the plus side, this type of investment usually pays higher than money market investments and certificates of deposit.

3. Index Funds

Index funds have become increasingly popular. With this option, one chooses a portfolio of stocks to invest in. These can include the S&P 500 and the Dow Jones index.

While a money manager would look at these index funds, this type of mutual funds requires a more hands-off approach.

This type of mutual fund is targeted toward the investor on a budget. If you are a beginner to investing, you may wish to consider index funds over other types of mutual funds.

4. Money Market Funds

This type of mutual fund is also a fixed-income mutual fund. This fund focuses on high-quality debt from corporations, banks, and governments. This debt is usually short term.

These type of funds include U.S. Treasuries, commercial paper, certificates of deposit, among others. An ideal money market fund will be: low risk, will produce high yields, and will require low expenses.

These are considered to be one of the safest investments available. They are used by beginners and seasoned investors alike.

5. Balanced Funds

Balanced funds, or asset allocation funds, are a combination of fixed-income funds and equity funds. They have a fixed ratio of the two funds. For example, you may have a balanced fund that is 70% equity fund and 30% fixed-income fund.

One type of balanced fund is target-to-date which alters the ratio to favour equity funds as you get closer to your retirement.

6. Income Funds

This type of fund is intended to provide a continuous income on a regular basis.

Usually, these funds consist of government and corporate debt. The funds hold onto the bonds until they mature and produce interest.

As they provide continuous income, they are usually targeted toward retirees, conservative investors, and can also be beneficial to beginners. But because they produce regular income, one must be aware of possible tax obligations.

7. Foreign Funds

Generally speaking, foreign funds (funds outside of your home country) can be volatile. It is imperative that if one invests in foreign funds, that adequate research is conducted on the stability of the jurisdiction.

At times, the foreign fund can be far riskier than a domestic fund. At other times, the foreign fund may be much safer than domestic funds. Make sure your money manager has adequate experience in managing foreign funds.

You should also do your research on the stability, country, and political risks of other jurisdictions.

As the economies of other nations grow, you may find that investing in a foreign fund is more lucrative than investing in Britain.

8. Speciality Funds

These are usually funds that have gained popularity among investors. There are no set criteria other than the popularity and success of these funds.

For instance, there are sector funds that target particular industries. One can select a successful fund in the technology sector, agriculture sector, or in healthcare. One should be aware of the possible volatility of a sector before investing in it.

Speciality funds can also comprise of regional funds that focus on successful mutual funds in particular regions—ranging from nations to continents (i.e., investing in Peru vs investing in South America as a whole).

Finally, we have seen a keen interest in ethical funds. These are funds for socially-responsible mutual funds such as solar energy, green energy, waste management, etc.

Build Your Portfolio

Now that you know the different types of mutual funds, you are ready to consult your financial advisor and build your portfolio.

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Investment Management

7 Benefits and Reasons to Invest in Mutual Funds

ByCFI.co

According to industry watchers, the net asset value of mutual funds across the United States stood at $17.71 trillion as of 2018.

Many individuals are looking to put their wealth into securities and other assets. However, due to the small size of their checks, investing in securities carries high costs.

Mutual funds come in to help aggregate individual investors. A principal mutual funds advantage is that you enjoy more convenience in investing. Here are seven reasons why a mutual fund is right for you.

What Is a Mutual Fund?

A mutual fund is an investment firm that brings together money from various investors to buy large-sized assets.

The assets that mutual funds typically put their money into are stocks, bonds, and other securities. The total sum of all the holdings a mutual fund invests in is called a portfolio and is managed by paid professionals.

When you give a mutual fund your money, you’re effectively buying its shares to become a part-owner earning from the income it generates.

How Mutual Funds Work

Regardless of the kind of fund you invest in, its performance (and revenue) will depend on its kind of management.

A passive mutual fund will invest according to a set strategy whose goal is to match a particular market index. As a result, these kinds of mutual funds don’t require you to have deep investment skills.

Passive funds charge lower management fees since they don’t call for as much hands-on management.

It’s worth noting that two popular types of passive mutual funds today are exchange-traded funds (ETFs) and index funds.

Actively traded funds, on the other hand, work to outperform the market indices. Consequently, they hold the potential to earn you more. They also carry a higher risk than passively traded funds, which you must put into consideration.

How Do You Make Money With a Mutual Fund?

Once a mutual fund makes a profit, there are three ways that you, as an investor, can earn a return – dividends, net asset value (NAV), or capital gains.

Dividends come from when the fund receives interest on the share it holds. Each investor in the fund gets a proportional amount, and you can choose to reinvest that in the fund.

When a mutual fund sells a security at a higher price than it bought it, it makes a capital gain. You’ll receive your portion of this income annually from the fund.

NAV is where the security you own increases in value due to the fund’s astute management. While you don’t immediately receive funds from the growing NAV, it means you stand to make more money should you sell your stake in the fund.

Mutual Funds Advantage

Mutual funds hold distinctive advantages as tools to help you grow your wealth. These benefits include:

1. Your Investment Is Diversified

Any financial consultant will tell you to take a diversified approach when it comes to wealth management. Diversification is whereby you mix the resources and investments in your portfolio to reduce the risk you face.

A mutual fund helps you to access various investments that face varying risks that can offset one another.

As a result, if a crisis or loss hits one sector, you won’t face as significant a loss as investments in other sectors can help offset the outflows.

2. Economies of Scale

One of the most compelling features of a mutual fund is the scale at which it operates. When many investors come together and pool their funds, they can buy into more lucrative assets that would have been hard to purchase as individuals.

Additionally, because of the large size of mutual funds, individual investors pay less for the service.

3. There’s Professional Management

If you don’t like picking the stocks to buy due to a lack of time or in-depth knowledge, then a mutual fund is for you.

Each mutual fund employs professional managers who do the heavy lifting with the research, picking stocks, and managing the portfolio. Thus, you get to access a full-time investment manager to help you grow your holdings at a fraction of the cost.

4. Liquidity

When you’re considering an investment as an individual investor, you have to assess its liquidity. The easier it is to sell what you hold, the faster you can access your money when you need it.

You can buy and sell a mutual find relatively easily unlike say disposing of property you have invested in.

In case you need money urgently, you can sell your holding in the fund fast. Should you spy out an opportunity in a sector your fund invests in, you can quickly and easily take up a position to benefit.

5. There’s Variety

As an individual investor, a mutual fund opens up a variety of options to put your money in that you’d not access on your own.

For example, a manager can run a fund that employs several investment approaches. You can access value investing, macroeconomic investing, and other methods all in one package.

Some mutual funds (known as bear funds) are structured to make money from a falling market. Such funds can enable you to protect your downside in ways you couldn’t as an individual.

Through this variety, you get to access foreign and domestic deals that can attractively grow your portfolio.

6. Easy Access to Specialized Sectors

If you’re interested in securing a position in complex sectors as an individual investor, then a mutual fund is the best tool to use.

Mutual funds have built up a track record of tackling extremely complex investment areas in a logistically easier manner for you. With one, low ticket investment, you get to outsource all the hard work that goes into such investment selections.

7. Transparency in Investment

Where you put your hard-earned money to work for you must be secure, and mutual funds give you this advantage.

Every mutual fund is heavily regulated to ensure investors are treated fairly. Therefore, with a mutual fund, you can have peace of mind since there is greater visibility into where you invest your money.

Let Your Money Work for You

Securities are a great way to grow your wealth, but as an individual investor, it can be costly to invest in them. A mutual fund is a vehicle through which your small check can make consistent returns. Another significant mutual funds advantage is the convenience you have as professional managers handle things. Pull together with other small investors to gain access to consistent investment returns.

Capital Finance International (CFI.co) is your premier online resource for all things investment. Reach out to us today for news, commentary, and analysis that will shift your investment thinking.

Wealth Management

How to Choose the Best Performing Mutual Funds

ByCFI.co

The total net assets of mutual funds worldwide were over $14 trillion in March of this year.

Mutual funds are a hugely popular investment vehicle globally. However, there are a huge number of them out there, with the quality of returns varying significantly from one to the next.

For a newcomer to the world of investment, it can be difficult to know what to look for in a mutual fund. The best performing mutual funds in the past may not continue to post exceptional returns in the future, especially in these uncertain economic times.

Read on as we take a closer look at mutual funds, and what to look for when investing in one.

What Is a Mutual Fund?

A mutual fund is a type of investment fund. A team of professional investment managers take capital from a large number of investors and invest the resulting pool of money in various securities.

Essentially, it is a means of investing in capital markets indirectly. Rather than picking stocks or bonds and putting money into them yourself, you allow a mutual fund manager to make the choices for you.

The advantage of this is that your investments are made by a highly experienced investment professional. This is safer than picking investments yourself, especially if you’re new to the world of investment.

The Different Types of Mutual Fund

There are many different mutual fund types. You can categorize them on the basis of the types of securities they invest in, the way they are managed, and the level of risk they take on in seeking returns.

To pick the best mutual fund for your needs, you need to know what your investment objectives are. These will dictate the type of fund you should pick.

Index Funds

Index funds are so named because they track the performance of a given index. Common indexes that form the basis for these funds include the S&P 500, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite (IXIC).

Index funds are an example of a passively managed fund. No input is required from investment managers, as the fund simply tracks an index.

Passively managed funds typically have much lower fees than actively managed funds for this reason. As outlined below, many investors who want a passively managed fund opt for an ETF rather than a mutual fund.

Stock Funds

Stock funds invest in a range of different stocks. Unlike index funds, fund managers actively pick these stocks individually and will chop and change them based on market trends.

Stock funds are therefore an example of an actively managed fund. Their fees are higher than some alternatives.

Stocks are riskier securities than bonds or other fixed-income securities. The risk of loss with a stock fund is therefore relatively high, but the opportunity for gain is greater as well.

Investment approaches vary widely from one stock fund to the next. Some managers will make more of an effort than others to diversify their holdings and hedge risks.

Specialty Funds

Specialty funds can be thought of as occupying a kind of middle ground between stock funds and index funds. Investment managers pick the stocks themselves, but within certain boundaries.

These boundaries typically relate to a market type. For instance, a cannabis market specialty fund will only invest in cannabis stocks.

Fixed Income Funds

Fixed income funds invest in low-risk securities. These include Treasury notes and bonds, as well as highly-rated corporate bonds.

These mutual funds cater to investors who prioritize income over growth.

If you’re simply trying to manage your money better with a view to long-term savings, a fixed-income fund might be just the thing for you.

Mutual Funds vs Other Fund Types

There are other types of investment fund that you may have heard about. While these can bear similarities to mutual funds, there are important distinctions to be drawn in each case.

Exchange-Traded Funds (ETFs)

The ETF is a close cousin of the mutual fund. Both types of fund take payments from investors and use these to invest in a variety of different securities.

ETFs tend to focus more on passive strategies than active ones. Many ETFs track indexes.

Mutual funds also tend to have more complex structures and a greater variety of share classes.

Hedge Funds

Hedge funds are another type of pooled investment fund. However, there are a number of important differences to be aware of with hedge funds.

Hedge funds use a number of complicated strategies to extract higher returns from their investments. These include high-frequency trading and short selling.

Hedge funds typically charge much higher fees than mutual funds.

Because of their complex, risky strategies, hedge funds are generally only available to professional investors, or those with a large number of investable assets.

What Sets the Best Performing Mutual Funds Apart?

There are certain mutual funds that regularly outperform their competition. While it is impossible to say exactly what the winning formula is for these, there are certain things that profitable funds have in common.

The first thing you should look for is a low expense ratio. A better approach to cost management means lower costs for you, and also indicates fiscal prudence on the part of the fund managers.

For actively managed funds, quality management is the key consideration. Look for managers with a proven track record of providing results.

Putting Your Money to Work

Mutual funds are a diverse family of investment vehicles. Some are designed to seek huge gains, while others simply aim to provide steady growth for clients looking to retirement.

The best performing mutual funds have consistent objectives that they stick to. The best investors do exactly the same thing.

When you’re deciding on your next mutual fund investment, start with a clear goal in mind.

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