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Saving and Investing: Types of Mutual Funds Print
Wednesday, 18th April 2007 (by J.D.)This article is about Basics, Money Hacks
This is part thirteen in a series that will occupy the “money hacks” slot at Get Rich Slowly during April, which is National Financial Literacy Month.
Yesterday Michael Fischer explained how mutual funds allow individual investors to pool money in order to achieve goals that would otherwise be out of their reach. Today he looks at different kinds of mutual funds:
Types of mutual funds (2:10)
There are several thousand mutual funds available in the U.S. alone. As you might imagine from such a selection, there’s a mutual fund for nearly every savings goal. There are mutual funds for those interested in socially-responsible investments. There are mutual funds for those interested in tech stocks. There are mutual funds based around Biblical principles. There are mutual funds that simply try to mirror the performance of a stock index. There are mutual funds that attempt to beat the markets in an aggressive fashion. There are junk bond mutual funds. There are real estate mutual funds. There are foreign funds. There are mutual funds designed to target specific retirement dates. There are mutual funds that trade on the stock market.
You name it, and there’s probably a mutual fund for it. As an example of the variety available, check out the “periodic table” of Vanguard exchange-traded funds. There’s a huge selection from which to choose.
So how does one decide which mutual fund to purchase? That’s a tough question. Picking mutual funds is like picking stocks: your choice will ultimately depend on your objectives, how long you wish to invest, and on your risk tolerance. (”How to select a mutual fund” actually sounds like a great topic for a future entry.)
Tomorrow Michael explains active and passive management, and discusses why index funds are so popular.
Michael Fischer spent nine years at Goldman Sachs, advising some of the largest private banks, mutual fund companies and hedge funds in the world on investment choices. Look for more episodes of Saving and Investing at Get Rich Slowly every weekday during the month of April. For more information, visit Michael’s site, Saving and Investing, or purchase his book.
April 18th, 2007 at 8:46 pm
I doubt there is a brined foods investment fund. Otherwise you’re probably right.
April 19th, 2007 at 2:21 pm
[...] Michael Fischer introduced us to mutual funds. Next, he described the various types. Today he looks at the difference between actively- and passively-managed [...]
April 21st, 2007 at 2:25 pm
I’ve helped a good number of fellow investors swap out of one mutual fund (stocks) to another, safer mutual fund (i.e. bonds)during large market corrections. I’d like to share this knowledge and offer the following….
Imagine you are a large institution like a bank, brokerage firm, hedge fund, etc. You see this photo and realize that Japan only charges 0.05% interest rate on the money they lend out. The rest of the world offers bonds that pay far more in interest rate percentages. You borrow from the Bank of Japan, and buy bonds, or make other more lucrative investments (stocks, real estate, notes). You make the difference. Pretty lucrative, eh? It’s been going on for years, and is known as the “yen-carry trade” or simply “carry trade”. In fact, the profit can be a two-fer since the 3-plus percentage-point yield difference can be added to if the dollar rises against the yen. This dynamic boosts profits because another advantage is gained when dollars are converted back to yen. You’re paying back a yen debt with yen worth less.
The problem is that when the Japanese economy grows too fast, the Bank of Japan considers controlling the growth by making money less affordable. They raise their prime rate, and “pull liquidity” out of the market (take yen out of circulation). This gets those invested with yen-carry trade dollars extremely nervous and they start to liquidate their stocks, treasuries, gold, real estate holdings, and so forth, at the same time. World Markets drop heavily, simultaneously, because the carry trade money is everywhere.
This isn’t the first time that a financial position became so heavily leveraged, causing a breakdown in the mechanism to create a mass exodus that created far-reaching financial problems. Back in October 1998, Russia defaulted on their debts and caused the implosion of a brokerage firm called Long Term Capital Management LP. This meltdown was discussed in James J. Cramer’s (Mad Money) book, “Confessions of a Street Addict”. Interestingly enough, the debt problem related to Russia not only hurt companies holding the debt (like Long Term Cap) but those other brokerages and firms that were leveraged to Long Term Cap brokerage. In addition to the debt problem, matters were made worse when there was a surge in the yen’s strength, up 20% in less than two months, at the same time.
Those counting on the weak yen (similar to a low Japanese prime rate mechanism), were now unwinding their investments and markets went “south” in a big way by month’s end (October 1998).
Let’s bring the issue back to the current time. Did we know that the Bank of Japan’s increase in their prime rate or an increased yen strength would cause markets to drop as trades unwound? Of course we did. The street blamed the Feb. 26th “correction” on a drop in the Chinese Stock Market. It’s easier to blame the Chinese government than to take the blame themselves and disclose the unbelievable role the carry trade has on the current world economy.
How can we monitor and forecast the next time this mechanism and domino effect are about to take place? I suggest the following:
Google the following on a regular basis:
William Pesek Jr. (Bloomberg staff writer that nailed the last correction on Feb. 22nd)
Jesper Koll (Chief Economist for Japan at Merrill Lynch & Co.)
Bank of Japan Meeting Schedule (currently April 27th, May 16-17, June 14-15, July 11-12, Aug 22-23 and Sep 18-19)
Be aware of the Japanese Economy’s Growth Rate. If it heats up and goes up over 4%, as it did last quarter of 2006, the Bank of Japan will dampen inflation and slow growth by increasing the prime rate. Most countries like the U.S. and Japan prefer less than 3% growth/year.
Watch for the Publication of the Bank of Japan’s MPM Minutes. The vote tally and the comments made in this document seem to have more of an effect on the carry trade than the actual meeting decision made, concerning the prime rate, the month before. The minutes are slated for publication on May 22, June 20, July 18, Aug 28, and Sep 25)
Know the Bank of Japan’s nine member Policy Board:
Toshihiko Fukui (Governor), Toshiro Muto (Deputy Governor), Kazumasa Iwata (Deputy Governor), Miyako Suda, Atsushi Mizuno, Kiyohiko G. Nishimura, Tadao Noda, Seiji Nakamura, and Hidetoshi Kamezaki. The comments they make and the votes they cast can have dramatic effects on worldwide markets.
Listen for hints that the Japanese bond rates are increasing. This is often another precursor for a rate increase.
Understand that the Bank of Japan will not upset and election year in Japan, and will table any prime rate increases for after the July 2007 elections.
June 21st, 2007 at 9:00 am
[...] Types of mutual funds [...]