How mutual fund investing makes YOU money. If you don't have the skill or desire to closely follow stock prices then mutual fund investing is ideal for you. If you find it hard to make decisions on when to buy and sell then mutual fund investing will allow you to invest with much more peace of mind, especially when you know you are in high yield funds. These funds are also good for investors who stress over possible sudden downward fluctuations of their investments.
Mutual funds are not traded in stock exchanges but are marketed through the mutual fund investing companies themselves or their agents.
Mutual funds are generally considered long term investments as you have to leave your money in long enough to recoup initial fees and ongoing fees. There is no time obligation as generally your money is redeemable at any time.
However, because of fees that may be applicable, taking your money out within a short time might mean you get less back than you put in. Also, some funds will penalize you for early redemption. The longer the term of your mutual fund investment the more the highs and lows of good years and bad years even out. Five to seven years are common minimum time frames for mutual fund investing onshore.
With the higher return of offshore funds however, the term of the investment with offshore mutual fund investing could be considerably less before seeing a good return on initial investment.
There's over 160,000 registered mutual funds worldwide to choose from. How do funds make money?
1. From dividends earned from stocks. 2. From interest earned on bonds. 3. From capital growth of securities owned by the fund, e.g. shares, real estate.
If these securities are sold by the fund at a higher price than they were bought for the resulting capital gain is passed on to investors as a distribution.
The distribution includes the dividend and interest the fund earned from the stocks and bonds. If these securities are not sold off by the fund the capital gain is reflected by the fund's shares increasing in value. Then individual investors can, if they wish, sell their shares (units) in the fund for a profit (more than they bought them for).
You, as investor, are usually given a choice to receive these distributions as a cheque/deposit in your bank account or to have it reinvested in the fund.
If you choose to reinvest the distribution you will get more shares allocated to you.
Each mutual fund has its own investment strategy and you can choose the fund that suits you according to your own investment objectives. The funds you choose will largely be determined by your risk tolerance. If you stress over backward movements then you will probably choose a low risk, balanced or income fund. If you can handle occasional poor returns with the likelihood of years with much higher returns then you will probably choose an aggressive growth fund.
Any losses the fund makes are carried forward to offset gains in the future.
How Do I make money from mutual fund investing? After the fund has made its investments and hopefully realized an overall profit, it then charges you the management fees.
Hopefully, after all fees and expenses the fund has still made a profit.
By law mutual funds have to distribute at least 90% (generally they distribute 98%) of profits each year. This profit is made up (after fees and expenses of course) of capital gains and income. Mutual fund investing offshore maximizes these potential profits resulting in more for you.
Some important dates: Record Date - the official date when the fund decides which shareholders are eligible for a distribution. X-Date - the actual day the NAV will drop by the amount which will be distributed. Distribution Date - When the fun actually pays the distribution to you.
Special Tip: Try not to buy into a fund just before its distribution Record date. If you do, the distribution will have to be declared as taxable income. If you make your investment just after the distribution you will still have the same value in the investment but you won't have a tax liability for the amount of the distribution.
Every distribution is a taxable event.
There are two components to a distribution:
A dividend distribution comes from dividends on stocks held by the fund and from interest on bonds held by the fund.
Capital gains distributions come from the profits made when stocks are sold by the fund. The fund should advise you when it makes the distribution, how much of it is long-term or short-term capital gain. Short-term is taxed as normal income. Long-term gain is taxed at half your normal rate. Long term gain is normally when the investment has been held for 12 months or more. Distributions are taxable whether you take them as a cash deposit to your bank or reinvest back into the fund. The exception is distributions to superannuation accounts. Super funds have their own set of complex rules.
Special Tip: When you finally decide to cash in your investment in a mutual fund make sure you include your reinvested distributions to your original investment base when it comes time to calculate any capital gains or losses on your investment.
For the most lucrative returns the best way to do your mutual fund investing is through offshore investing mutual funds. For speedy access to any of the mutual fund information simply click on one of these links:
You are here: Mutual Funds - An explanation of what they are. Offshore Investing Mutual Funds - an outline of why offshore funds beat all, and a bit about taxation. Advantages - a discussion of the advantages and the disadvantages of these funds. Types of Mutual Fund - a listing and explanation of all the different types of funds onshore and offshore. Offshore Investments - how to go about making your offshore investment through an offshore trust. Understanding the Mutual Fund Prospectus - an explanation of some of the main things to look for when reading a prospectus. Choosing a Mutual Fund - 6 important things to consider before making your decision to invest in a particular fund. Compare Mutual Funds - how to analyze what the 1 year, 3 year, 5 year and 10 year returns mean, and how to compare funds with those figures. Mutual Fund Managers - A very comprehensive list in alphabetical order of many of the managers of mutual fund families around the world.
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