Turnover is a fund's selling and buying of stocks. When you sell stocks, you have to pay a tax on capital gains. This constant buying and selling produces a tax bill that someone has to pay. Mutual Funds don't write off this cost. Instead, they pass it off to you, the investor. There is no escaping Uncle Sam. Contrast this problem with index funds, which have lower turnover. Because the stocks in a particular index are known, they are easy to identify. An index fund does not need to buy and sell different stocks constantly; rather, it holds its stocks for a longer period of time, which results in lower turnover costs. Investors who use a tax-advantaged account can avoid paying taxes on Mutual Funds distributions when mutual fund investing.
Why don't all these money and financial magazines tell you about index funds? Why don't the covers of these magazines read "Index Funds: The Most Obvious And Rational Investment!" It's simple. That's a boring heading. Who would want to buy something that isn't exciting or that doesn't tickle one's imagination of immense riches? A magazine with that headline won't sell as many copies as a magazine that boasts "Our 100 Best Mutual Funds For 2008!" Remember: a magazine company is in the business of selling... magazines. It can't put a boring headline about index funds on its front cover, even if that headline is true. If a mutual fund makes money, both you and the mutual fund company make money. But if a mutual fund loses money, you lose money and the mutual fund company still makes money. Metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used proxy for the U.S. stock market, are hardly at bargain levels. This has lead several market pundits to predict single digit annual returns for domestic Mutual Funds over the next decade. While pursuing the search for the best mutual fund, some mutual fund investors tend to focus exclusively on fees and expense ratios. To determine the NAV at the end of the trading day, the mutual fund company looks at all of the assets that are in the basket, determines their value and divides that number by the total number of outstanding shares in the fund. There are now more Mutual Funds than there are stocks in the US market. With over 26 thousand funds that Morning star keeps track of, how can someone know where to find the best ones. A mutual fund is the most popular form of a pooled investment known today. They are designed for people who want to have their money professionally managed at a fairly reasonable cost. In addition to professional management, they give an investor convenience, diversification, record keeping, tax reporting, and safekeeping of securities. These are another kind of internal fee that you'll never see come out, but you need to be aware of. Most loaded funds have 12b-1 fees, and a few no-load funds do too. This is an important one. Many Mutual Funds sold today by bank brokers and full-cost brokers like Merrill Lynch and Edward Jones have commissions, or loads. Loaded funds commissions can vary, but most are between 1% and 5.75%. That means for every $1000 you invest, $45 to $57.50 could be coming out for a commission to the broker, and the rest gets invested into your account. You never see these fees come out, but they definitely affect your annual returns. You want to try to make sure your expense ratios are around 1% or less per year. Some specialty funds are going to be higher, but for the most part you should try to buy funds that are under 1%. Funds are required by law to produce a document called a prospectus, which no one ever reads, that tells you important information about the fund. It is important to understand mutual fund investing by category since there is a different investment risk and different rewards associated with it. There are different types of Mutual Funds ranging from blue chip funds, mid cap funds, small cap funds, and many more. Mutual Funds are categorized by the way they yield returns to investors. They can be fixed income, global, growth, core, mixed equity, sector, and mixed equity. Research on this topic is crucial in order to avoid possible investing errors when mutual fund investing. Investors who partake in mutual fund investing should understand the investment objectives, the risks, and the expenses of a fund very cautiously before investing in stock. Investors will usually buy shares in small quantities through a broker at a discount to the net asset value or at a small premium.
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