Best Mutual Funds Explained
All you need to know about mutual funds, including the risks, rewards and terms  

Best Mutual Funds Now

best mutual fundsNow that we've learnt a little about the various types of mutual fund available in broad terms, we need to start to understand some of the investing terms we are likely to encounter in our search for the best mutual funds. Now like many other forms of investing there are many terms which may mean nothing to you, or perhaps you have heard before, but don't really understand. The reason it is so important that you have a grasp of all these is twofold. First, if you don't understand the product and are unable to compare one offering with another, then you will break the first rule of investing ( for me ) which is understand where your money is going to be invested. Secondly, if you don't understand all the terms, then you will not be able to ask the relevant questions and talk to the fund issuer in terms they understand. If you want to invest wisely, then you have to know as much ( if not not more ) than the person selling you the product. If you don't have the time, or simply can't be bothered and are prepared to rely on someone else's judgement, then don't complain when your investments start under performing.  At some point you have to take responsibility for your own decisions ( lecture over - sorry!!) So, let's start with some of the most important terms and documents which I will try to explain simply and clearly and I have ignored fees, which we will look at separately as there are so many ( surprise, surprise!!)

Best Mutual Funds Now - Prospectus & Annual Report

Before you invest in any mutual fund, there is one document that you must read beforehand, and this is the prospectus. In simple terms the document will detail everything about the fund - it's aims and objectives, the nature of it's investments, and the investing strategy and goals. So it will tell you whether the fund is for income, or for growth, or a balance between the two. It will tell you the types of securities the fund will invest in, the risks, and the overall performance. It will also explain how to buy, sell, or exchange shares in the fund, the management charges and any fees for redemption of your shares. In addition the prospectus will include an SAI ( Statement of Additional Information ) which will supplement any information in the prospectus. In short this document provides you with a wealth of information and financial highlights, and you should never invest without reading it first - it's as simple as that!

Finally, you should obtain a copy of the fund's annual report. If you are a shareholder in the fund then you will receive this automatically at year end. The report will detail the funds audited statements and a list of the funds securities and investments, along with a performance of the fund against a comparative index, a review of past performance and outlook for the future. Please try to read between the lines when considering the future performance which will always be presented with a "gloss". A must read document in order to find the best mutual funds.

Best Mutual Funds Now - Risk and Return Bar Charts

Having read the prospectus you will no doubt have found a page near the front which has a risk and return bar chart, along with a table. The bar chart will detail the funds performance over the last 10 years, or for the number of years the fund has been operating if this is less.  This information is required by law. The figures provided will show returns both before and after tax, and just like any other report there may be some extra footnotes which provide additional information, so again make sure you read them. The associated table of returns will also provide a comparison against a relevant market index.  Immediately following this table you should find another called a fee table which details all the fees. We will look at this on the next page where I will explain, as best I can, all the relevant costs and charges of investing in mutual funds. Now two of the most important terms you will come across are Net Asset Value and Share Class.

Best Mutual Funds Now - Net Asset Value

Let me give you the formal definition of net asset value, and then take an example which I hope will explain it more clearly. In simple terms the NAV is calculated by adding all the assets of the fund together ( cash, value of securities etc), less any liabilities ( expenses to you and me) and this is then divided by the number of shares the fund has outstanding. This is generally done each day at the close of trading ( called marking to the market). Now for us as simple investors, think of it as the share price. So if for example you were investing $1500 in a mutual fund which had a quoted NAV of 15, then you will own 100 shares in the fund - it's as simple as that. If the NAV rises, then your share holding increases in value, and if it falls, then it will decrease - just like stocks in the stock market. The above is a very simple example, and I haven't included fees etc which would reduce the return, but I hope the above helps you to understand how NAV works - all funds quote them daily so you can check the return on your best mutual funds. Money market funds will try to keep their NAV at par or $1 per share, but if the fund performs poorly then this may fall below $1. - this is often referred to as "breaking the buck".

Best Mutual Funds Now - Share Classes

When you invest in a mutual fund, you may find that you have the option to invest in several different "classes" of shares. Typically these are called Class A, Class B or Class C shares. The difference between each class is in the way fees and expenses are allocated to the share class, not in the investment assets. The same pool of investments is used with the same goals and objectives for all classes of shares. The difference is in the fee structure. So for example Class A might be for larger sums invested for longer periods, with lower  charges, whilst a Class B share might be for smaller sums over shorter periods, but higher charges. So within a fund it is possible not only to match your investing goals to the fund itself, but then to tailor your returns within the fund itself by choosing a Class A, B or C share.

Best Mutual Funds Now - Taxable Equivalent Yield

Taxable equivalent yield is also sometimes referred to as comparative yield, and is simply a way for you to measure and compare how much yield you would have to earn on a taxable investment in order to match or better the yield on a tax free investment. In order to calculate this, assuming just Federal taxes, then deduct your income tax rate from 100 and then divide the tax exempt fund's yield by this number expressed as a decimal. So if your tax is 25%, then 100 - 25 = 75 which as a decimal is 0.75. Now divide the yield ( let's assume 1.8% ) by 0.75 to give you a taxable yield of 2.4% ( 1.8/0.75). So in other words you would need to earn 2.4% on a taxable fund, in order to earn the same as 1.8% yield on a tax free fund. If your bond is also free of state taxes then simply deduct these from 100 and perform the same calculation.

Now, let's look at some of the terms you will come across regarding fees and charges. All funds charge fees and expenses, so you need to understand how to compare one with another, and to be very clear on what your fund will charge one you have identified the best mutual funds for your investing strategy. I have spread this over two pages as there are quite a few to explain and broken up into two groups - shareholder fees and annual operating expenses, so let's start with shareholder fees in our search for the best mutual funds.

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