Finance Review

Archive for February, 2009

Mutual funds are one of the top investments on the market, despite this, with more than 10,000 different funds that hold over $4 trillion in investments!Mutual funds have been very popular due to historially good returns. However, those returns have taken a dive from 2008 to 2009. Anyone who thought they were less risky now knows they were wrong – but that doesn’t mean there still aren’t good mutual fund investments out there.

A mutual fund accumulates its money from investors who choose to invest in the selection of stocks, bonds, and other securities that the fund managers select. Usually the fund is made up of multiple individual investments. As these investments increase or decrease in value, you wll also gain or lose on your investment. When the investments pay dividends, you also get a proportional share of those payouts. Because mutual funds have a professional management team in place, they can tak the place of investing in individual stocks or bonds, doing much of the investing work for you.

A mutual fund is designed to be a unique type of company that combines money from multiple investors and then invests it for the entire group, following a specifically defined set of objectives for the fund. Mutual funds attrace investments through selling shares to the public, and are allowed to operate much like any other publicly traded company that sells stock in itself. Funds take the investment money they receive when they sell their shares plus money made from any previous investments, then use these funds to buy investment vehicles for the fund, including bonds, stocks, and money market vehicles.

The best bond fund for most average investors could be a high-yield, or long-term, or corporate bond fund. Then again, maybe not. This article takes you back to bond basics to find the best bond fund for most investors. Read on. You could save thousands, or make additional thousands based on the information presented here.

Getting back to bond basics, folks invest in bonds and bond funds primarily to earn higher income than they can get from stocks and savings vehicles like bank CDs. Few average investors invest in individual bond issues, because that requires significant knowledge and experience.

Bond funds, on the other hand, are professionally managed and offer investors diversification, sometimes at a reasonable cost. These funds hold bonds in their portfolio, and these bonds pay interest. This interest is passed on to investors in the form of dividends.

There is only one way I know of to get rich with bond funds. Wait until interest rates get historically high, as in the early 1980’s. Then, borrow a ton of money, and buy as soon as rates start to fall. Now, let’s get back to reality because interest rates are near historical lows.

When you buy shares of a bond fund these days, you are simply trying to get the highest income you can, without taking on heavy risk. As I have said in other articles, bond funds have interest rate risk. This means that if you invest now and interest rates go up in the future, the value of your investment will fall. Who wants a bond(s) that pays 6% when new bonds are paying 9%? Investors will buy it … but only at a reduced price.

NOW, let’s look for the best bond fund available. We will play “elimination” and weed out the risky ones and the losers. First, high-yield bond funds pay higher dividends for one reason. They hold high-risk bonds that are often referred to as JUNK. Second, long-term bond funds pay higher than average yields (dividends) because they have higher interest rate risk. Third, foreign bond funds are riskier because the value of the dollar fluctuates, and this could work against you.

It seems simple. But it is not in fact. Thousands are opening up new financing companies each day and some may not know that they are doing it. But taking advantage of “in-store” credit offers is already a way of financing. This is what is sometimes called indirect lending. In effect the customer is applying for credit in a store but a completely different company is extending credit. Indirect lending is most common in the automotive industry.

In case of in-store credit, the biggest culprits are the big box electronics retailers and furniture showrooms. When applying for their credit and you take advantage of “same as cash” offers, you are actually applying for credit with a completely different company. And in many cases, that company is a financing company.

If your application is approved, you will be walking away with a brand-new TV set, a dining room table and a brand-new financing account that will show up within 30 days in your credit report and your credit scores will suffer because of it.

This is completely legal and, in fact, the customer agreed to it when he signed the credit application. Most people do not read the fine print but it most indirectly identifies the indirect lender by name.

So what to do about it when you have been a victim? There is not much the customer can do about it. Even if he has an old financing company account that has already paid a long time ago, the mere fact that you have can still hurt the credit scores.