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Wednesday, November 15, 2017

Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 24)


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Mutual Funds (part I)
by
Charles Lamson


Value Funds

Value funds are the bargain shoppers of the mutual fund world. They look for stocks that are selling below the value of their assets.

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Do not get the idea that these are junk companies. Hidden under a shabby financial exterior may be a solid company waiting for things to go in its way. On the other hand, it very well could be a junk company. Knowing the difference is what you pay the fund manager for.

There are some very successful investors who have made a career out of investing in value stocks and watching them turn into growth stocks. In the meantime, the stocks tend to be fairly stable, so you might say that value funds are moderately risky.

Some value funds can generate high-expense ratios due to extensive trading, so be cautious of those numbers.

Value funds are a long-term investment.


Tax-Free Funds

Tax-free funds, as I am sure you have guessed by now based on previous posts, are bond funds. I mention them here as an example of how diverse mutual funds can be.

You know by now that bond fund strategy is to generate tax-free income by investing in a variety of U.S. Treasury, state, municipal and other agency bonds.

Not much return here, but a lot of safety (for those funds who focus on highly rated bonds) and tax-free income based on what the fund buys and where the buyer lives.

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International Funds

International funds target investments in foreign stocks and bonds, with some funds adding U.S. investments for balance. They seek out stable and mature foreign markets, as well as opportunities in emerging markets.

There are some risks associated with these funds, but in many respects they are very similar to strictly U.S. funds. Some of the funds add U.S. stocks and bonds to give them a more stable base, while others are out there on the edge looking for big gains and risking corresponding loses.

PROCEED WITH CAUTION
International funds allow you to participate in the growth of developing countries and regions around the world under the guidance of professional managers.

You might ask why international funds are not included in sector funds, since foreign markets were mentioned as a recognized sector. There is no particular reason other than to give a bit more attention to these funds. One market watcher will put them under sector funds and another will hold them separate.

Do not get too hung up on being precise with these terms, because their definitions are very fluid.

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Precious Metals Funds

Precious metals funds could also be positioned under sector funds, but are worth mentioning by themselves. Precious metal funds and particularly gold funds, have been around for a long time. When the U.S. economy was suffering through high inflation back in the 1980s, gold in the form of bullion and gold funds were seen as effective shelters from inflation, and their values soared.

However, when inflation started dropping, so did the gold funds. During periods of economic uncertainty and inflation, gold has a magic to attract money like almost nothing else. The 1990s were not kind to the gold funds. A strong economy and low inflation beat them severely. Will inflation come back? Who knows? If it does, expect gold funds to shoot up again.


Socially Responsible Funds

Socially responsible funds, also called green funds, base their investments on strict ethical, political, and/or environmental guidelines. These funds may avoid tobacco stocks, for instance, or industries with reputations for polluting the environment.

JUST A MINUTE
There are funds for just about any strategy, including funds that are interested in being socially and environmentally responsible funds because of their investments.

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Once considered a novelty, they have grown in recent years. Most analysts still rate them as somewhat risky because of the severe limits on their investment options.

Some politically active groups have started their own mutual funds in response to the difficulty in finding funds that matched their beliefs. If you have strong feelings about certain issues, there is nothing wrong with putting your money where your heart is.

You may have to settle for a limited selection of funds, but you will have the comfort of knowing your pocketbook is not vetoing your political or ethical convictions.

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*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 161-164*


END

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