Start Saving with Low Minimum Investment Mutual Funds

December 2nd, 2008  |  Published in Mutual Funds  |  1 Comment

I’m a big fan of Vanguard’s low cost mutual funds but they aren’t particularly friendly to the young and new investor because they often have decently sized minimum investments. Most require $3,000 to start, though their STAR Fund requires a mere $1,000, which is a lot when you consider most people are looking to save a few hundred dollars a month. At $100 a month, it would take two and a half years to accrue the $3,000 needed (or 10 months for the STAR Fund), to open a Vanguard fund. While you could always put it in an online bank and earn a few percentage points while you waited, most people want to jump right in – fortunately there are many companies offering mutual funds with a low minimum investment.

To find one, I recommend using Morningstar’s Mutual Fund Screener. You can set the minimum initial purchase to less than $500, no load only, and expense ratios less than or equal to 1% – that will give you a result set of at least 200 (that’s the limit). For even more granularity, you can set the star rating to 5 and narrow it down to a mere 125 to choose from.

That will give you a head start on your mutual fund investing!

Strata of Mutual Fund Expense Ratios

May 19th, 2008  |  Published in Mutual Funds  |  3 Comments

One of the most important characteristics about a mutual fund is its expense ratio. The expense ratio is the cost of running the fund and is charged to cover the expenses of running that fund, usually represented by a percentage of assets. Some of the things the expense ratio covers include, but are not limited to, the investment advisory fee, administrative costs, 12b-1 distribution fees, operating expenses, and paying for the fund manager’s Mercedes-Benz car allowance (just kidding on the last one).

The expense ratio is also one of the easiest things for you to control when you select a fund. You can’t predict the future with respect to returns, but you sure can predict how much of your investment is consumed by the operational expenses of a fund.

So, what are the three strata of mutual fund expense ratios? Passively managed funds, actively managed funds, and hedge funds (though hedge funds really don’t count, I had to throw them in there).

Passively Managed Funds

Passive funds are index funds, funds that don’t have a manager and management board actively making decisions on what investments to pursue. They don’t spend time researching companies or interviewing CEOs, they simply track an index such as the S&P 500 as closely as they can. Vanguard’s S&P 500 fund, the Vanguard 500 Index (VFINX), has an expense ratio of 0.18%. Fidelity’s S&P 500 fund, the Fidelity Spartan 500 Index, has an expense ratio of 0.10%.

Actively Managed Funds

Active funds are those mutual funds that have a manager and management team leading the way on deciding which investments to pursue. These funds generally have higher expense ratios, starting in the 1-1.5% range, simply because you need to pay people to conduct the research, make the decisions, and because you need to pay for the trading activity of the fund as well. If you take a look at some of the funds on Money’s Best Mutual Fund List of 2008, you’ll see them run the gamut. The Matrix Advisors Value fund costs 1.11%, Vanguard Windsor II costs only 0.33%, the T. Rowe Price Blue Chip Growth costs 0.81%, and the T. Rowe Price Emerging Markets Stock costs a pricier 1.21%. As you can see, the larger cap funds often charger lower expense ratios because there is less trading involved while the smaller cap and emerging markets funds have slightly higher ratios. Either way, they’re still far higher than the extremely low passively managed funds.

Hedge Funds

Hedge funds are a totally different animal, often charging high fees on both the asset amount and the profits earned. I wanted to throw these funds in there only because they represent the most expensive of the funds you’ll see and their name, hedge funds, don’t really indicate what they do anymore. Hedge funds are now essentially funds for the extremely wealth, thus they have less oversight by the SEC, and their fees are structured in a way that rewards performance. Hedge funds often will have an “expense ratio,” as a percentage of the managed assets, plus a fee based on the profitability of the fund. Something like 2% of assets and then 20% of profits is not unheard of.

There you have it, the three strata of expense ratios in the mutual fund world. It’s important to know where each of those lies so you don’t end up purchasing an actively managed fund that charges you an arm and a leg. When selecting funds, it’s valuable to check out resources like Morningstar to get a good idea of the landscape before selecting an investment.

10 Rules: Don’t Try To Beat The Market

December 23rd, 2006  |  Published in Investing  |  Comments Off on 10 Rules: Don’t Try To Beat The Market

I wholeheartedly believe in this fourth tip of Forbes ten rules for building wealth of not trying to beat the market. Honestly, you have better things to do with your time than research investments and you should be doing those, instead of checking PE ratios, growth rates, and the like.

Strangely, Forbes focuses a lot on asset diversification and portfolio balancing in this tip and a little less on convincing a reader to go with some index funds. While I think the underlying idea is that you go with funds anyway (building on the idea of keeping things simple), they don’t make mention of it in this particular tip.

One tool that they mentioned that is worth checking out is Morningstar’s free Instant X-Ray tool.

Source: Fortune