Basics of investing mutual funds,

If you were studying for a test on mutual funds or if you were handed the task of giving a presentation on the basics of investing mutual funds, here are key 10 definitions that you need to know:

1. Mutual Fund Definition: A mutual fund is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types, called holdings combine to form one mutual fund, also called a portfolio.Now for the simple explanation: Mutual funds can be considered baskets of investments. Each basket holds dozens or hundreds of security types, such as stocks or bonds. Therefore, when an investor buys a mutual fund, they are buying a basket of investment securities. However, it is also important to understand that the investor does not actually own the underlying securities--the holdings--but rather a representation of those securities; investors own shares of the mutual fund, not shares of the holdings.

1. Mutual Fund Loads: Loads are fees charged to the investor when buying or selling certain types of mutual funds.There are four types of loads: Front-end loads are charged up front (at the time of purchase) and average around 5% but can be as high as 8.5%. For example, if you invest $1,000 with a 5% front load, the load amount will be $50.00 and therefore your initial investment will actually be $950. Back-end loads, also called contingent deferred sales charges, are charged only when you sell a back-loaded fund. These charges can also be 5% or more, but the load amount typically declines over time and can be reduced to zero after a certain number years. Load-waived funds are funds that normally charge a load but waive it if there is some qualifying circumstance, such as purchases made within a 401(k) plan. No-load funds do not charge any loads. This is the best type of fund to use because minimizing fees helps maximize returns.When researching mutual funds, you can identify the load types by the letter 'A' or 'B' at the end of the fund name. Share class A funds are front-loaded funds and share class B are back-loaded funds. Sometimes the load-waived funds have the letters 'LW' at the end of the fund name. Once again, be sure to look for no-load funds. A few good no-load mutual fund companies include Vanguard, Fidelity, and T. Rowe Price.
   
   
   
   

1. Mutual Fund Share Class: Each mutual fund has a share class, which is basically a classification of how the fund charges fees. There are several different types of mutual fund share classes, each with its own advantages and disadvantages, most of which center upon expenses. Class A shares are also called "front load" funds because their fees are charged on "the front" when the investor first buys shares of the fund. The loads typically range from 3.00% to 5.00%. A shares are best for investors who are using a broker and who plan to invest larger dollar amounts and will buy shares infrequently. If the purchase amount is high enough, investors may qualify for "breakpoint discounts." Class B Share Funds are a share class of mutual funds that do not carry front-end sales charges, but instead charge a contingent deferred sales charge (CDSC) or "back-end load." Class B shares also tend to have higher 12b-1 fees than other mutual fund share classes.For example, if an investor purchases mutual fund Class B shares, they will not be charged a front-end load but will instead pay a back-end load if the investor sells shares prior to a stated period, such as 7 years, and they may be charged up to 6% to redeem their shares. Class B shares can eventually exchange into Class A shares after seven or eight years. Therefore they may be best for investors who do not have enough to invest to qualify for a break level on the A share, but intend to hold the B shares for several years or more. Class C Share Funds charge a "level load" annually, which is usually 1.00%, and this expense never goes away, making C share mutual funds the most expensive for investors who are investing for long periods of time.The load is usually 1.00%. In general, investors should use C shares for short-term (less than 3 years). Class D Share Funds are often similar to no-load funds in that they are a mutual fund share class that was created as an alternative to the traditional and more common A share, B share and C share funds that are either front-load, back-load or level-load, respectively. Class Adv Share Funds are only available through an investment advisor, hence the abbreviation "Adv." These funds are typically no-load (or what is called "load waived") but can have 12b-1 fees up to 0.50%. If you are working with an investment advisor or other financial professional, the Adv shares can be your best option because the expenses are often lower. Class Inst Share Funds (aka Class I, Class X, or Class Y) are generally only available to institutional investors with minimum investment amounts of $25,000 or more. Load-Waived Funds are mutual fund share class alternatives to loaded funds, such as A share class funds. As the name suggests, the mutual fund load is waived (not charged). Typically these funds are offered in 401(k) plans where loaded funds are not an option. Load-waived mutual funds are identified by an "LW" at the end of the fund name and at the end of the ticker symbol. For example, American Funds Growth Fund of America A (AGTHX), which is an A share fund, has a load-waived option, American Funds Growth Fund of America A LW (AGTHX.LW). Class R Share Funds do not have a load (i.e. front-end load, back-end load or level load) but they do have 12b-1 fees that typically range from 0.25% to 0.50%. If your 401(k) only provides R share class funds, your expenses may be higher than if the investment choices included the no-load (or load-waived) version of the same fund.
   
   
   

1. Expense Ratio: Even if the investor uses a no-load fund, there are underlying expenses that are indirect charges for use in the fund's operation. The expense ratio is the percentage of fees paid to the mutual fund company to manage and operate the fund, including all administrative expenses and 12b-1 fees. The mutual fund company would take those expenses out of the fund prior to the investor seeing the return. For example, if the expense ratio of a mutual fund was 1.00%, and you invested $10,000, the expense for a given year would be $100. However, the expense is not taken directly out of your pocket. The expense effectively reduces the gross return of the fund. Put differently, if the fund earns 10%, before expenses, in a given year, the investor would see a net return of 9.00% (10.00% - 1.00%).
   
2. Index Funds: An index, with regard to investing, is a statistical sampling of securities that represent a defined segment of the market. For example, the S&P 500 Index, is a sampling of approximately 500 large capitalization stocks. Index funds are simply mutual funds that invest in the same securities as its benchmark index. The logic in using index funds is that, over time, the majority of active fund managers are not able to outperform the broad market indexes. Therefore, rather than trying to "beat the market," it is wise to simply invest in it. This reasoning is a kind of "if you can't beat 'em, join 'em" strategy. The best index funds have a few primary things in common. They keep costs low, they do a good job of matching the index securities (called tracking error), and they use proper weighting methods. For example, one reason Vanguard has some of the lowest expense ratios for their index funds is because they do very little advertising and they are owned by their shareholders. If an index fund has an expense ratio of 0.12 but a comparable fund has an expense ratio of 0.22, the lower cost index fund has an immediate advantage of 0.10. This only amounts to only 10 cents savings for every $100 invested but every penny counts, especially in the long run, for indexing.
   
   
   

1. Market Capitalization: With investment securities market capitalization (or market cap), refers to the price of a share of stock multiplied by the number of shares outstanding. Many equity mutual funds are categorized based on the average market capitalization of the stocks that the mutual funds own. This is important because investors need to be sure of what they are buying. Large-cap Stock Funds invest in stocks of corporations with large market capitalization, typically higher than $10 billion. These companies are so large that you have probably heard of them or you may even purchase goods or services from them on a regular basis. Some large-cap stock names include Wal-Mart, Exxon, GE, Pfizer, Bank of America, Apple and Microsoft. Mid-cap Stock Funds invest in stocks of corporations of mid-size capitalization, typically between $2 billion and $10 billion. Many of the names of the corporations you may recognize, such as Harley Davidson and Netflix, but others you may not know, such as SanDisk Corporation or Life Technologies Corp. Small-cap Stock Funds invest in stocks of corporations of small-size capitalization, typically between $500 million and $2 billion. While a billion-dollar corporation may seem large to you, it's relatively small compared to the Wal-Marts and Exxons of the world. A subset of small-cap stocks is "Micro-cap," which represents mutual funds investing in corporations with average market capitalization usually less than $750 million.
   

1. Mutual Fund Style: In addition to capitalization, stocks, and stock funds are categorized by style which is divided into Growth, Value or Blend objectives. Growth Stock Funds invest in growth stocks, which are stocks of companies that are expected to grow at a rate faster than the market average. Value Stock Funds invest in value stocks, which are stocks of companies that an investor or mutual fund manager believe to be selling at a price lower than the market value. Value Stock Funds are often called Dividend Mutual Funds because value stocks commonly pay dividends to investors, whereas the typical growth stock does not pay dividends to the investor because the corporation reinvests dividends to further grow the corporation. Blend Stock Funds invest in a blend of growth and value stocks. Bond funds also have style classifications, which have 2 primary divisions: 1) Maturity/Duration, which is expressed as long-term, intermediate-term, and short-term, 2) Credit quality, which is divided into high, investment grade, and low (or junk).
   
2. Balanced Funds: Balanced Funds are mutual funds that provide a combination (or balance) of underlying investment assets, such as stocks, bonds, and cash. Also called hybrid funds or asset allocation funds, the asset allocation remains relatively fixed and serves a stated purpose or investment style. For example, a conservative balanced fund might invest in a conservative mix of underlying investment assets, such as 40% stocks, 50% bonds, and 10% money market.
   
   
   
   
3. Target Date Retirement Funds:This fund type works like its name suggests. Each fund has a year in the name of the fund, such as Vanguard Target Retirement 2055 (VFFVX), which would be a fund best suited for someone expecting to retire in or around the year 2055. Several other fund families, such as Fidelity and T. Rowe Price, offer target date retirement funds. Here's basically how they work, other than just providing a target date: The fund manager assigns a suitable asset allocation (mix of stocks, bonds, and cash) and then slowly shifts the holdings to a more conservative allocation (less stocks, more bonds and cash) as the target date draws closer.
   
   
4. Sector Funds: These funds focus on a specific industry, social objective or sector such as health care, real estate or technology. Their investment objective is to provide concentrated exposure to specific industry groups, called sectors. Mutual fund investors use sector funds to increase exposure to certain industry sectors they believe will perform better than other sectors. By comparison, diversified mutual funds--those that do not focus on one sector--will already have exposure to most industry sectors. For example, an S&P 500 Index Fund provides exposure to sectors, such as healthcare, energy, technology, utilities, and financial companies. Investors should be careful with sector funds because there is increased market risk due to volatility if the sector suffers a downturn. Over-exposure to one sector, for example, is a form of market timing that can prove harmful to an investor's portfolio if the sector performs poorly.
   
   
   

Investing in Mutual Funds Tip

 

 

 

Investing in Mutual Funds Tip # 1: How to Get Started Investing

Investing begins before buying the first mutual fund (or prior to buying the next one). If you are just getting started investing with mutual funds, you may want to try beginning with a balanced fund. You will also want to ask questions: What is it that you would like to accomplish with your savings? Do you have specific goals, such as saving for retirement, or do you have some broadly defined goals, such as the accumulation of wealth for the general purpose of strengthening your financial security? What is your time horizon? One year? Five years? 10 years?

Investing in Mutual Funds Tip #2: Know Your Risk Tolerance

Before choosing your funds, you need to have a good idea of how much risk you can tolerate. Your risk tolerance is a measure of how much fluctuation (a.k.a. volatility—ups and downs) or market risk you can handle. For example, if you get highly anxious when your $10,000 account value falls by 10% (to $9,000) in a one-year period, your risk tolerance is relatively low—you can’t tolerate high risk investments.

Investing in Mutual Funds Tip #3: Determine Your Asset Allocation

Once you determine your level of risk tolerance, you can determine your asset allocation, which is the mix of investment assets—stocks, bonds and cash—that comprises your portfolio. The proper asset allocation will reflect your level of risk tolerance, which can be described as either aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).

Investing in Mutual Funds Tip #4: Review the Basic Types and Categories of Mutual Funds

 

 

Mutual funds are organized into categories by asset class (stocks, bonds and cash) and then further categorized by style, objective or strategy. Learning how mutual funds are categorized helps an investor learn how to choose the best funds for asset allocation and diversification purposes. For example, there are stock mutual funds, bond mutual funds and money market mutual funds. Stock and bond funds, as primary fund types, have dozens of sub-categories that further describe the investment style of the fund.

Investing in Mutual Funds Tip #5: Learn How to Choose the Best Funds

 

 

With thousands of mutual funds to choose from and hundreds of different fund families offering them, an investor can suffer from choice overload and possibly make needless mistakes. Without a doubt, no-load funds are the best choice for mutual fund investors.
Now that you know your asset allocation, you need to begin choosing the best mutual funds for you and your investment goals. If you have a broad choice of mutual funds you begin by using a fund screener or you may simply compare performance to a benchmark. You’ll also want to consider important qualities of mutual funds, such as fund fees and expenses (see the Expense Ratio), and manager tenure.

Investing in Mutual Funds Tip #6: Build Your Portfolio of Mutual Funds

 

 

Building a portfolio of mutual funds is similar to building a house: There are many different kinds of strategies, designs, tools and building materials; but each structure shares some basic features. To build the best portfolio of mutual funds you must go beyond the sage advice, "Don’t put all your eggs in one basket:" A structure that can stand the test of time requires a smart design, a strong foundation and a simple combination of mutual funds that work well for your needs.

 

 

Investing in Mutual Funds Tip #7: Know the Basics on Mutual Fund Taxation

 

 

How does one reduce taxes on mutual funds? Which types of funds are best for taxable accounts? Why did you receive a 1099? Understanding mutual fund taxation will help you improve your overall returns by being a smarter investor. As they saying goes, "Nothing is sure in life but death and taxes." However, taxes can be minimized or even avoided with regard to mutual fund investing. Therefore, with knowledge of the basics on mutual fund taxation, you will be enabled to increase your overall investment portfolio returns.

Investing in Mutual Funds Tip #8: Avoid the Dave Ramsey Mistake

 

 

Dave Ramsey is a good entertainer and seems like a genuinely nice person. However, with regard to mutual funds in specific, his investment philosophies are bordering on dangerous. Mutual fund investors can get some good tips from his talk radio show but they are wise to understand the difference between entertainment and sound investment practices.
Be sure to check out this article on what Dave Ramsey gets wrong with mutual funds.
Armed with just a handful of tips on mutual funds, investors can do well to build their own portfolios. But remember that mutual fund research, analysis and portfolio management is not for everyone. If you don't enjoy doing it, chances are you won't be good at it.

Investment in Mutual Funds : A Beginner Guide

How to invest in mutual funds? When to invest and which funds to invest is the often asked question. We have tried to address the questions of mutual fund investors, who are just beginning their mutual fund investments. In short, it is a beginners guide on how to invest in mutual funds in India. Let us take a look:

What does a mutual fund actually do?

A mutual fund gathers money from investors and parks this money into investments that an investor wants.
So, if SBI Mutual Fund initially comes-up with an open ended equity scheme, then the money that it gathers from investors for this scheme is automatically invested in equity shares.
So, the units which were issued at Rs 10, would start going up if shares prices rally. As this happens the net asset value of the units, which started at near Rs 10, start rising. So, it goes goes up from Rs 10 to say Rs 11. The investor who bought the units at Rs 10 can sell it back to the mutual fund at Rs 11. Now, since this is an open ended scheme the mutual fund can sell units continuously at the net asset value. So, a new investor who did not originally buy at Rs 10, can now buy at Rs 11.

What you need to begin investing in mutual funds?

To begin investing, the first thing you need to do is to be "KYC compliant". This is nothing but a submission of your address proof, photographs, date of birth proof and definitely your PAN card.
You can directly approach brokers for investing in mutual funds or can directly approach the mutual fund house. We have given you a list of mutual funds below to choose from. As mentioned earlier, you can either consider an equity mutual fund or a debt mutual fund. We will tell you the type of mutual funds that you can invest in.
It is important to remember that you have to update your KYC each time you change your address. This is important to stay updated.

What are the Type of mutual funds that you can invest in?

Now, if you are a young investor, you could start investing in a host of mutual fund schemes. If you have just started your career, you can invest in equity related mutual funds, which put bulk of their money, as high as 80 per cent in shares.
These are risky. They not only give you high returns, but, you can also lose money. In the long term though, they have given superior returns than most bank deposits. Now, young investors can go for these schemes as they have the ability to take risks.
For individuals who are in their 50s and 60s the right way would be to go in for debt related mutual funds.
So, debt related mutual funds, unlike equity mutual funds, they out their money in safe instruments like government securities. For medium risk investors, they can choose balanced funds, which put a little money in equities and little in debt.

The type of returns that you can get from mutual funds

There are two types of returns that you can get from a mutual fund. One is the capital appreciation and the other is dividends. So, when you invest, you have to choose either a dividend plan or a growth plan.
Under the growth plan the money is not distributed like dividends, but is added back and the scheme grows. Let us give you an example. Say you start investing in a mutual fund at a price of Rs 10. If you take a dividend, then your NAV will hardly move, because the mutual fund has distributed the profit.
On the other hand, in growth plan the dividend gets added back and the plan grows. So, if you started investing at Rs 10, you would probably see an NAV of Rs 16 in some years. This means you can sell the units at a price of Rs 16.

How are returns from mutual funds taxed in India?

Beginners to investing in mutual funds, should know how to save tax. As mentioned in the article, you can either opt for growth or dividend distribution. Under the dividend distribution plan the dividends earned by the investor is tax free in the hands of the investor.
In fact, this is same like equity shares where dividends are tax free, up to a sum of Rs 10 lakhs. On the other hand if you go in for the growth plan, there is a capital gains that applies on the units that are sold at a profit. Hence, it is always advisable to take a look at the option of dividend distribution.
It is important to understand the tax liability before you invest in the same.

Important terms that you should know in a mutual fund

As an investor you should know some of the popular mutual fund terms that are used. Some of these include expense ratio, NAV and exit load.
Expense ratio: This ratio is nothing but the expenses that a mutual fund house incurs on advertising and selling, administrative costs to manage the fund etc. This is deducted from the investors returns.
Exit load: This is nothing but the amount that charges that are levied if you sell the units of a fund before the stipulated time. It is generally 1% of the NAV if you sell before six months.
NAV
The net asset value is the rate at which an investor, buys and sell the units of a mutual fund.
SIP and SWP
These two terms are the systematic investment plan and the systematic withdrawal plan, which we have explained later in the article.

What to look for before investing in a mutual fund?

If you are a novice and a beginner are looking to invest in equity funds, it is best to seek some professional advise. As for those who have some knowledge it is a good time to look at the expense ratio, exit ratio, past track record and whether the markets have really rallied and you are buying the fund at an extremely high price to earnings ratio. If the equity markets have rallied it maybe time to wait for some more time, before parking a lumpsum amount in equity mutual funds. Remember, returns from equity mutual funds are largely determined by how stock markets move. So, if prices are high, you might want to take a breather for some time, before starting to invest.

The SIP route to invest in mutual funds

You may have so often heard the term Systematic Investment Plan or SIP. Why should beginners to mutual fund use this route? Say you invest a lumpsum in equity mutual funds and the stock markets crash. Your NAV of the fund would crash and hence you might incur huge capital losses. Now in SIP you could invest small amounts from your monthly salary, which will get deducted from your bank account every month. So, if in the first month you bought a little and the index crashes, next month you are buying some more at a lower cost and reducing your average cost. On the other hand if markets rise, you have already bought at lower prices. In short, it is one of the best ways to take spread your risk and today is the most popular means of investing.
Similarly, when you want to withdraw the money you can opt for the systematic withdrawal plan. So, you have an option for depositing and withdrawing through the mutual fund route.

When to withdraw your money?

You can withdraw your money from equity funds, when you believe that your objective has now been met. You can also withdraw your money from mutual funds, if you believe that the fund has performed poorly and it is time to shift schemes. By and large, if you are tracking markets, you know when to withdraw if markets have got overheated. Remember, it would be more prudent to consult some experts who have knowledge, if you yourself lack the knowledge. You can gradually also make a move to some of the debt scheme of the same mutual fund house or another mutual fund house.

What are the returns that you can expect?

Ultimately, whether you invest in gold, bonds, fixed deposits or mutual funds, it is all about returns. In terms of returns we can say with some certainty that in the longer term they have generated superior returns tan bank deposits. Today, banks give you an interest rate of just 7 per cent, which is why you have very little choice then invest in mutual funds. If you are a long term investor it beats returns from gold and real estate. What we are talking is about equity mutual funds only and not debt funds. The latter tends to give you returns almost similar to bank deposits and government securities. But, the most important thing to remember is that past track record is no indication of future performance. 

Switching from one scheme to another

You can also switch from one mutual fund scheme to another, if market dynamics change frequently. For example, let us say that equities are trading higher and you have made decent money in shares. What you can do is move money from the equity mutual fund to the debt mutual fund. However, you must note that capital gains tax would apply in case you have sold and made a profit. If you switch from an equity mutual fund before one year, you need to pay capital gains tax at the rate of 15 per cent. For debt funds, a period of three years will constitute short term capital gains. So, one needs to be careful when switching between mutual funds. Also, switch only when you have the knowledge or else you may end up making losses.
 

 

Importance of checking the net asset value

It is extremely important for a mutual fund investor to check the net asset value or NAVs. As we explained before, you can check all about mutual funds here
You have to buy a mutual fund based on its NAV and hence the need to check. For example, if you want to invest Rs 10,000 in a scheme and the NAV is Rs 15, then you would end up getting around 650 units only. Also, if possible you can keep a tab to see if the NAV has gone higher in the past. What this would mean is that the returns could be limited in the future. It is extremely difficult for beginners to understand the exact entry and exact that you should make in a mutual fund. Hence, it is important that you buy systematically on declines, to hedge against any large scale loss from falling equity prices.

Consolidation of mutual funds schemes

The Securities and Exchange Board of India is now looking at the possibility of consolidating the various schemes of mutual funds in India. This is because there are far more mutual fund schemes in the country.
This will also give an opportunity and a clarity for investors, because of the huge number of prevailing schemes.
Investors are always advised to read the scheme details of all the mutual funds before investing. This is especially through for equity mutual funds which can tend to be a lot more risky.
Before investing it also important to make and understand the nomination process in the schemes. Also frequent switching before one year would only results in you being charged an exit load. So, you need to be a little more careful.

 

Investment types and terminology

Investment types and terminology

Sixteen investment terms you need to know.

How and where you invest your hard-earned money is an important decision. However, fully understanding your investments can require a crash course in terminology. The following definitions for a few key terms can help increase your understanding of the investment process and enable you to make better decisions:

Investment types

The most common terms that are related to different types of investments:

§  Bond: A debt instrument, a bond is essentially a loan that you are giving to the government or an institution in exchange for a pre-set interest rate paid regularly for a specified term. The bond pays interest (a coupon payment) while it's active and expires on a specific date, at which point the total face value of the bond is paid to the investor. If you buy the bond when it is first issued, the face or par value you receive when the bond matures will be the amount of money you paid for it when you made the purchase. In this case, the return you receive from the bond is the coupon, or interest payment. If you purchase or sell a bond between the time it is issued and the time it matures, you may experience losses or gains on the price of the bond itself.

§  Stock: A type of investment that gives you partial ownership of a publicly traded company.

§  Mutual fund: An investment vehicle that allows you to invest your money in a professionally-managed portfolio of assets that, depending on the specific fund, could contain a variety of stocks, bonds, market-related indexes, and other investment opportunities.

§  Money market account: A type of savings account that offers a competitive rate of interest (real rate) in exchange for larger-than-normal deposits.

§  Exchange-Traded Fund (ETF): ETFs are funds – sometimes referred to as baskets or portfolios of securities – that trade like stocks on an exchange. When you purchase an ETF, you are purchasing shares of the overall fund rather than actual shares of the individual underlying investments.

Investment strategies

Once you have a better understanding of the investment choices available, you may come across specialized terms that explain how money can be invested:

§  Allocation of investments: Also known as asset allocation, this term refers to the types of investments/asset categories you own and the percentage of each you have in your investment portfolio.

§  Diversification: This is a risk management technique that mixes a wide variety of investments to potentially minimize your investment risk.

§  Dollar cost averaging: An investment strategy used whereby an investor purchases fixed investment amounts at predetermined times, regardless of the price of the investment.

“There are a variety of terms that describe your gains, losses, and individual investments. ”

Investment terminology

Once you start investing, there are a variety of terms that describe your gains, losses, and individual investments.

§  Capital asset: A long-term asset such as land or a building that is not purchased or sold in the normal course of business. In other words, anything you own and use for personal or investment purposes. Examples include your home, your car, and stocks or bonds held in a personal account.

§  Capital gain/loss: Profit or loss from the sale of an asset.

§  Capital appreciation/depreciation: The amount by which the value of an asset increases or decreases compared to the amount you paid for it. You receive the capital gain or loss when you sell the asset.

§  Dividends: A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.

§  Index: A portfolio of securities representing a particular market or industry or a portion of it. Indices often serve as benchmarks for measuring investment performance– for example, the Dow Jones Industrial Average or the S&P 500 Index. Although investors cannot directly purchase an index, they are able to invest in mutual funds and exchange-traded funds that are based on the indexes. These types of vehicles enable investors to invest in securities representing broad market segments and/or the total market.

§  Margin account: An account that allows you to borrow money from your brokerage account in order to purchase securities. The loan is collateralized by the existing securities and cash held in the account.

§  Prospectus: A document filed with the SEC that describes an offering of securities for sale to the public. The prospectus fully discloses the risks, policies, and fees of the offering.

§  Yield: The income return on an investment. This refers to the interest or dividend received from a security based on the investments cost or face value.

By taking the time to learn about the common types of investments and the language that accompanies them, you can become a smarter and savvier investor.

Related topics: 

§  Investing, 

§  Adjust Over Time

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My Financial Guide

This information is provided for educational and illustrative purposes only and is not a solicitation or an offer to buy any security or instrument to participate in any trading strategy. Investing involves risk including the possible loss of principal. Since each person's situation is different you should review your specific investment objectives, risk tolerance and liquidity needs with your financial professional before selecting a suitable savings or investment strategy and to see how this information may apply to your specific situation.

Investments in fixed-income securities are subject to market, interest rate, credit, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond's price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower-rated bonds. If sold prior to maturity, fixed-income securities are subject to market risk. All fixed-income investments may be worth less than their original cost upon redemption or maturity.

Investing involves risk, including the possible loss of principal. Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.

Mutual Fund investing involves risk. The investment return and the principal value of your investment will fluctuate and your shares, when redeemed, may be worth more or less than their original cost.

Money market accounts seek to maintain fixed principal, but rate of return will fluctuate.

Exchange Traded Funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.

Diversification does not guarantee profit or protect against loss in declining markets. Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

Diversification does not guarantee profit or protect against loss in declining markets.

A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets.

Margin borrowing may not be suitable for all investors. When you use margin, you are subject to a high degree of risk.

Investing involves risk including the possible loss of principal. Dividends are not guaranteed and are subject to change or elimination.

Real Estate Investing Guide for New Investors

Real Estate Investing Guide for New Investors 

• If you're intent on developing, acquiring, or owning, or flipping real estate, you can better come to an understanding of the peculiarities of what you're facing by dividing real estate into several categories.
  
  
  • Residential real estate investments are properties such as houses, apartment buildings, townhouses, and vacation houses where a person or family pays you to live in the property. The length of their stay is based upon the rental agreement, or the agreement they sign with you, known as the lease agreement.  Most residential leases are on a twelve-month basis in the United States. 
  • Commercial real estate investments consist mostly of things like office buildings and skyscrapers.  If you were to take some of your savings and construct a small building with individual offices, you could lease them out to companies and small business owners, who would pay you rent to use the property.  It isn't unusual for commercial real estate to involve multi-year leases.  This can lead to greater stability in cash flow, and even protect the owner when rental rates decline, but if the market heats up and rental rates increase substantially over a short period of time, it may not be possible to participate as the office building is locked into the old agreements.
  • Industrial real estate investments can consist of everything from industrial warehouses leased to firms as distribution centers over long-term agreements to storage units, car washes and other special purpose real estate that generates sales from customers who temporarily use the facility. Industrial real estate investments often have significant fee and service revenue streams, such as adding coin-operated vacuum cleaners at a car wash, to increase the return on investment for the owner.
  • Retail real estate investments consist of shopping malls, strip malls, and other retail storefronts. In some cases, the landlord also receives a percentage of sales generated by the tenant store in addition to a base rent to incentivize them to keep the property in top-notch condition.
  • Mixed-use real estate investments are those that combine any of the above categories into a single project. I know of an investor in California who took several million dollars in savings and found a mid-size town in the Midwest. He approached a bank for financing and built a mixed-use three-story office building surrounded by retail shops. The bank, which lent him the money, took out a lease on the ground floor, generating significant rental income for the owner. The the other floors were leased to a health insurance company and other businesses. The surrounding shops were quickly leased by a Panera Bread, a membership gym, a quick service restaurant, an upscale retail shop, a virtual golf range, and a hair salon. Mixed-use real estate investments are popular for those with significant assets because they have a degree of built-in diversification, which is important for controlling risk.
  • Beyond this, there are other ways to invest in real estate if you don't want to actually deal with the properties yourself.  Real estate investment trusts, or REITs, are particularly popular in the investment community.  When you invest through a REIT, you are buying shares of a corporation that owns real estate properties and distributes practically all of its income as dividends.  Of course, you have to deal with some tax complexity - your dividends aren't eligible for the low tax rates you can get on common stocks - but, all in all, they can be a good addition to the right investor's portfolio if purchased at the right valuation and with a sufficient margin of safety.  You can even find a REIT to match your particular desired industry; e.g,. if you want to own hotels, you can invest in hotel REITs.
  • You can also get into more esoteric areas, such a tax lien certificates.  Technically, lending money for real estate is also considered real estate investing but I think it is more appropriate to consider this as a fixed income investment, just like a bond, because you generating your investment return by lending money in exchange for interest income.  You have no underlying stake in the appreciation or profitability of a property beyond that interest income and the return of your principal.  
  • Likewise, buying a piece of real estate or a building and then leasing it back to a tenant, such as a restaurant, is more akin to fixed income investing rather than a true real estate investment. You are essentially financing a property, although this somewhat straddles the fence of the two because you will eventually get the property back and presumably the appreciation belongs to you.

Real Estate Investing for Beginners

Real Estate Investing for Beginners

Simply stated, when investing in real estate, the goal is to put money to work today and allow it to increase so that you have more money in the future. The profit, or "return", you make on your real estate investments must be enough to cover the risk you take, taxes you pay, and the costs of owning the real estate investment such as utilities, regular maintenance, and insurance.
Real estate investing really can be as conceptually simple as playing monopoly when you understand the basic factors of the investment, economics, and risk.

In order to win, you buy properties, avoid bankruptcy, and generate rent so that you can buy even more properties. However, keep in mind that "simple" doesn't mean "easy". If you make a mistake, consequences can range from minor inconveniences to major disasters. You could even find yourself broke or worse.

The 4 Ways Real Estate Investors Make Money

When you invest in real estate, there are several ways you can make money:

1. Real Estate Appreciation: This is when the property increases in value due to a change in the real estate market, the land around your property becoming scarcer or busier like when a major shopping center is built next door, or upgrades you put into your real estate investment to make it more attractive to potential buyers or renters. Real estate appreciation is a tricky game. In fact, it is riskier than investing for cash flow income.
2. Cash Flow Income: This type of real estate investment focuses on buying a real estate property, such as an apartment building, and operating it so you collect a stream of cash from rent, which is the money a tenant pays you to use your property for a specific amount of time. Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and more.

Real Estate Related Income: This is income generated by "specialists" in the real estate industry such as real estate brokers, who make money through commissions from buying and selling property, or real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property. This type of real estate related income is easy to understand. For example, a hotel management company gets to keep 5 percent of a hotel's sales for taking care of the day-to-day operations such as hiring maids, running the front desk, mowing the lawn, and washing the towels.

Ancillary Real Estate Investment Income: For some real estate investments, this can be a huge source of profit. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. In effect, they serve as mini-businesses within a bigger real estate investment, letting you make money from a semi-captive collection of customers.

Tips for Purchasing Real Estate Investment Properties

There are several ways to buy your first real estate investment. If you are purchasing a property, you can use debt by taking a mortgage out against a property. The use of leverage is what attracts many real estate investors because it lets them acquire properties they otherwise could not afford. However, using leverage to purchase real estate can be dangerous because in a falling market, the interest expense and regular payments can drive the real estate investor into bankruptcy if they aren't careful.

You will almost NEVER purchase a real estate investment in your own name. Instead, for risk management reasons, consider holding real estate investments through special types of legal entities such as limited liability companies or limited partnerships (you should consult with a qualified attorney for his or her opinion as to which ownership method is best for you and your circumstances).


That way, if the real estate investment goes bust or someone slips and falls, resulting in a lawsuit, you can protect your personal assets because the worst that can happen in some circumstances is you lose the money you've invested. This lets you sleep at night because unless you've screwed up somewhere, your 401(k) plan assets, Roth IRA investment, and other retirement accounts should be out-of-reach.

Which Type of Real Estate Investment Should You Make?

When you are ready to start the process of real estate investing, you'll want to decide which of the real estate investment types is most appropriate for you. To help you understand the options, I wrote an article called The 8 Types of Real Estate Investments that explains the difference between REITs, industrial properties, residential investments, etc.