Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
What Type Of Investor Should I Be
Getting started in the business of investing is much easier than it used to be. So is improving your returns if you already invest. No longer is the field restricted to the wealthy or large financial institutions. More and more these days every day people like mums, dads, students and even children are trying their hand at what used to be the exclusive playground of the rich.
However before delving into what is a very exciting and potentially financially rewarding world you should assess what type of investor you actually want to be. If not you need to seriously consider what type of investment style would be best for your position.
Types of investors
The buy and holders of the community put their money into shares that they feel are good value and hold them for expanses of anywhere between 1 and 50 years. This investment style is most suited to people who are long term orientated by nature, not looking for a quick profit and have an eye for good companies. The most famous proponent of such an approach is the world’s second richest man, Warren Buffet, so you could say that it isn’t such a bad style.
Day trading is the complete opposite of the buy and hold approach and involves individuals who buy and sell shares in a very short period generally within the same day. If you have a lot of time and are prepared to watch market movements very closely then this approach may be for you. Generally there are two schools of thought, one being fundamental and the other technical. You will always find people pushing one or the other but it makes more sense to incorporate a blend both.
Fundamentalists tend to look at company profits, management direction, future plans/growth prospects, the economy as a whole and such like company and economic factors.
While those with a mathematical or scientific background might look at share price charts employing various technical analysis techniques, ratios, indicators and trends in order to identify which shares they want to look at further.
For example a chart that has all the indications that a share is going to be a good choice for the future is useless if the company is going to file for bankruptcy. In other words how much you are willing to loose.
Investors come in many forms and there is no right or wrong way. Different things work for different people. It is vital that you decide which method best suits you and that you stick to this method.
Types of Mutual Funds and How to Invest in Them
If you wish to invest in the markets but do not have sufficient knowledge or resources, a mutual fund is the way to go. Mutual funds offer you an easier way to invest in the market without any need to directly monitor or manage the investments on a regular basis. Basically, it is nothing but a pool of funds contributed by a number of investors with an Asset Management Company (AMC) which assigns a fund manager to invest it in stocks, bonds or money market instruments for commensurate returns.
The beauty of this investment option lies in the fact that you can start by investing as little as INR 1000 and have a professional fund manager allocate the accumulated pool of funds in suitable stocks or securities to create a diversified portfolio of investments. So, you get to have a slice of the profits from some well-performing stock by investing a relatively small sum of money. Additionally, mutual funds offer periodic dividends based on performance of the funds.
Before investing, you need to know all about different types of funds which offer you the option of investing in a variety of financial instruments and get proportionate returns based on the size of your funds. These are explained below:
1. Equity Mutual Funds:
If you wish to invest solely in company shares, equity-based fund is the perfect choice for you. It offers the option to invest in a selection of stocks to create a balanced portfolio with lesser risk as compared to directly investing in equities because this fund would be managed by professionals. However, since equity-based funds have a higher risk-reward potential, you should think carefully before opting for it.
2. Debt Mutual Funds:
In this option, funds are allocated solely in debt instruments including bonds and commercial paper among other things. It has a low-risk profile and offer regular returns. This is the right choice for investors whose first priority is to protect their investments. However, the returns are not as attractive as in equity-based funds.
3. Money Market Mutual Funds:
These are also known as liquid funds which seek to invest in short-term debt instruments like certificates of deposit, fixed deposits and treasury bills. This option is best for those who prefer higher liquidity and protection of capital over higher returns involving a higher level of risk.
4. Gold Funds:
Gold has been an investment option for millennia and its value has only grown in modern times because of its viability as an investment during periods of financial inflation or when markets are not performing well in general. Traditionally, people have directly invested in gold for all its advantages but with gold funds you can choose to invest in gold through Gold ETF (Exchange-Traded Funds). This lets you avoid the risk of theft or damage associated with investing in physical gold. Gold funds might also invest in shares of companies involved in gold mining.
You can choose the type of fund which suits your requirements or opt for a balanced fund instead in which funds are allocated in both equity and debt instruments to reduce the risk level to an extent and still gain from high-performance equities. It is important to read the offer document carefully before investing in mutual funds and choose your Asset Management Company (AMC) with discretion to avoid any issues later.
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Some TIPS for Mutual Fund Investing
What are the best ways to find the best mutual funds? What are the criteria for the best funds that I should look for? What categories of funds or fund families are the best? These are the most important questions when one goes out to try and find the best growth or bond fund. Some of the best sites for mutual fund research are: Morningstar (easily the most famous), others are magazine type web sites such as money magazine, motley fool, etc. As far as what actually makes a great fund?
Expense ratio (which is the ratio of what they charge to run the fund as opposed to the total amount invested), a long history of success, and most importantly (in my opinion) how well the fund has done in bad times! For instance, in the incredibly disastrous year of 2008, if a fund did not lose more than 10% or stayed equal (regardless of whether that fund was a growth fund or a bond fund), then this fund should be considered an "all weather" fund, because the year 2008 is the acid test for mutual funds for all time, or what they are now calling it, a "Generational Low" in the stock market.
Some analysts and financial experts have been saying that mutual fund investing is for the birds, a suckers bet. I totally disagree. I believe that all investors should have a portion of their portfolio in grown and bond mutual funds, and a separate part of their portfolio in a very low priced discount broker with the best commissions. This way if you're wrong on one end of your portfolio, you might be right in the other.
Diversification is the key; it always has been and always will be. In the horrible years of 2000-2002, not being diversified in your portfolio, and too invested in tech funds, would have meant huge losses. Starting in March of 2000 the stock market started to go down and didn't stop going down until October of 2002. At that point, the NASDAQ dropped from 5200 to 1100 and the Dow dropped from 11,700 to 7200! Not being diversified with those kinds of losses could have meant the end of your investing career. And has the year 2008 taught all of us, history DEFINITELY does repeat itself. IN my humble opinion one of the worst mistakes you can make in mutual fund investing is paying either a back end or front end fee. The number one rule of buying a mutual fund is never pay a front end or back end fee. Also remember to rebalance your portfolio every few months.
Please visit my blog My Blog. Good luck choosing the right fund!
J. Caruso
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