One of the most common ways of selecting a mutual fund is to invest with the crowd in today’s hot funds. Unfortunately, jumping from one winning fund to another is a recipe for disaster. The mutual funds that the crowd follows typically have had a hot recent performance and tend to gather all the new mutual fund sales.

Investors as a whole are primarily allocating their new investments to a small number of mutual funds and to a smaller number of mutual fund companies. Investors have invested over $400 billion in the 2843 different mutual funds, but one-third of those assets are invested in only 50 of those funds and one-half of those assets are invested in the largest 100 funds.

There are benefits to following the market leaders. Larger mutual fund companies and larger funds have the ability to reduce costs and attract the best professional money managers. However, the biggest limitation is that today’s better-selling mutual fund may not be tomorrow’s winner. This is true for any mutual fund but it seems to plague the best seller, and the one that garners the most attention, the most often.
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Copyright 2006 Michael Saville

Low fees and expense ratios.

In their search for the best no load mutual fund, some investors tend to select mutual funds based solely on their fees and expense ratios. The rationale is that by choosing mutual funds with low fees, investors can have more of their capital invested. Also, no load mutual funds with low expense ratios will pass on more of the returns they earn to their shareholders. However, metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used proxy for the U.S. stock market, are hardly at bargain levels. Several market experts forecast single digit annual returns for domestic mutual funds over the next decade.

Is shopping for the lowest fees and expense ratios the right way to select mutual funds? Not always. The answer depends on the type of mutual fund you are evaluating, the time you can devote to evaluating and managing your mutual funds investments, and the type of cost incurred.

Investing in the Best No Load Index Mutual Funds.

If you believe markets are generally efficient and prefer to invest in an index mutual fund to achieve an index-like return, shopping for the best index mutual fund based on low fees and a low expense ratio makes perfect sense. An index mutual fund’s portfolio manager seeks to invest the fund’s assets to track an index as closely and as cost-effectively as possible. Larger index funds have an advantage since they can spread their operating costs over a larger asset base. Some of the interesting index mutual fund options currently available include no load index mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index Fund (Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios of 0.09%, 0.10%, and 0.18%, respectively.
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It is difficult to provide a general definition of a hedge fund. Initially, hedge funds would sell short the stock market, thus providing a “hedge” against any stock market declines. Today the term is applied more broadly to any type of private investment partnership. There are thousands of different hedge funds globally. Their primary objective is to make lots of money, and to make money by investing in all sorts of different investments and investments strategies. Most of these strategies are more aggressive than than the investments made by mutual funds.

A hedge fund is thus a private investment fund, which invests in a variety of different investments. The general partner chooses the different investments and also handles all of the trading activity and day-to-day operations of the fund. The investor or the limited partners invest most of the money and participate in the gains of the fund. The general manager usually charges a small management fee and a large incentive bonus if they earn a high rate of return.

While this may sound a lot like a mutual fund, there are major differences between mutual fund and hedge fund:

1. Mutual funds are operated by mutual fund or investment companies and are heavily regulated. Hedge funds, as private funds, have far fewer restrictions and regulations.
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Copyright 2006 Equitrend, Inc.

Many investors still don’t know about Exchange Traded Funds (or ETFs) and their advantages over traditional mutual funds.  In this article, we’ll examine Exchange Traded Funds, their history, performance and advantages and why you should never buy a mutual fund again.

ETF 101

Exchange Traded Funds can most accurately be described as the happy marriage of a stock with a mutual fund.

Like mutual funds, when an investor buys an ETF, he is buying a pool of securities at one time.  For instance, an ETF known as DIA, or “Diamonds.” allows the investor to take a position in the Dow Jones Industrial Average.

Like a stock, an ETF can be purchased through a brokerage account, can be traded throughout the day, can be bought on margin and offers stock-like trading features such as limit orders, stop orders and short selling

ETFs come in many different flavors.  They track all the major indexes like the Dow, S&P 500, NASDAQ 100, Russell 2000 and others.  They’re also available for investors who want to trade sectors like energy, technology, precious metals, financial, health care, emerging markets, interest rates and many more.
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