Just like there are mutual funds which invest in stocks, there are also mutual funds and ETFs that invest in TIPS. A TIPS mutual fund is especially a great way to invest in TIPS. It offers convenience and diversification at a low cost.

Buying TIPS through a mutual fund (or an ETF) is a good idea. The advantages of  buying TIPS through a mutual fund include:

1. Buy at any time without a transaction fee. Although there is no charge to buy individual TIPS bonds at auctions through certain places (Fidelity, Schwab or TreasuryDirect), the auctions only come up a few times a year. If you want to buy individual TIPS bonds when there’s no auction, you must use a brokerage account and buy on the secondary market. Some brokerage firms charge a commission for bond orders. Vanguard charges minimum $40. You also pay a higher price (“markup”) than the wholesale price when you buy on the secondary market. Or you will just have to wait until the next auction, but the prices will have changed by then. You can buy shares in a TIPS mutual fund at any time without a transaction fee.

2. Instant diversification. A TIPS mutual fund holds about 20 bonds with different maturities. You get all of them with one purchase. If you are buying individual TIPS bonds, they don’t come on auction at the same time. You must wait for the auctions or pay commissions to establish your positions.

3. Sell at any time without a transaction fee. If you have individual TIPS bonds, there is no fee if you wait until they mature. If you want to sell before they mature, you may have to pay a commission. TreasuryDirect doesn’t sell for you any more. Vanguard charges at least $40. You also receive a lower price (“markdown”) than the wholesale price when you sell on the secondary market. If you sell shares in a TIPS mutual fund, you receive the Net Asset Value for each share, without having to pay a transaction fee.

4. Buy or sell for any random amount. Minimum additional investment in the Vanguard TIPS fund VIPSX is $100. Want to buy $456.78? No problem. The individual TIPS bonds are in $100 increments at TreasuryDirect or in $1,000 increments in a  brokerage account.

5. Reinvest interest payments immediately without charge. If you have individual TIPS bonds, you must hold the interest payments elsewhere. Reinvesting in another TIPS bond is also subject to the auction cycles and $100 increments at TreasuryDirect or $1,000 increments in a  brokerage account. The most convenient way to reinvest the interest payments from an individual TIPS bond is putting it into a TIPS mutual fund. TIPS mutual funds typically offer automatic dividend reinvestment for free.

6. Easy tax handling (for taxable accounts only). Individual TIPS bonds in a taxable account have a unique phantom income issue. Both the interest payments and the inflation adjustment are taxable, although the latter is not paid out until the bond matures. A TIPS mutual fund shields that issue away from the investor. You receive regular dividends from the fund and you get a Form 1099-INT at the end of the year, just like you do when you invest in any other mutual fund.

All these convenience come at a cost of 0.20% a year for the Vanguard Inflation-Protected Securities Fund (VIPSX). That’s $20 a year for each $10,000 invested. If you invest $50,000 or more in TIPS, Vanguard’s fund offers Admiral shares which cut down the expense ratio to 0.12%, or $12 a year per $10,000 invested. The cost is very reasonable. Why bother buying individual bonds then? Because,

1. Low expenses. If you buy at auctions and hold to maturity, there is no extra expense. If you buy a large amount of TIPS, you can save money by building your own fund with individual bonds. Fidelity, Schwab and TreasuryDirect charge no fee or commission if you buy at auctions and hold to maturity. Even if you buy on the secondary market, as long as you buy long-term bonds in large quantities and you hold the bonds to maturity, a one-time commission and markup spread over many years can be less expensive than having to pay an ongoing expense year after year.

2. Be your own fund manager. You get to decide what maturity you buy. When you buy fund shares you buy a basket. The fund’s (experienced) managers decide what to buy and when to buy. With individual bonds, now you become the (amateur) manager for your own fund. Want short maturities? Buy 5-year notes. Want long ones? Buy 20-year bonds.

Real Estate Resources
Bay Area AV | San Jose Real Estate |San Jose CA Real Estate | New San Jose Homes | San Jose Relocation | Silicon Valley RelocationSan Francisco Relocation | Silicon Valley Ca Real Estate | San Jose CA Real Estate | San Jose Real Estate Blog

Investing with experienced mutual fund managers is a time-tested strategy. These industry veterans have established track records that enable an investor to more easily learn about the managers, and establish a comfort level with their strategies and credibility. Research providers, such as Morningstar, make the search for data even easier; but what about the rookies?

New funds are launched all the time, and fund managers with new ideas sometimes deliver impressive growth, right out of the box. How can you tell if a new fund will be a winner or a loser? How do you know if you should take a chance on a new fund? Read on to find out.

Look Before You Take a Chance While investing in a new fund might seem like taking a shot in the dark and hoping for the best, first impressions can be deceiving. Although a specific fund might be new, it’s possible that it is being run by an experienced fund manager with a long and distinguished track record. Likewise, the fund complex itself could have a strong history of launching successful new products. Nothing is certain, and even veteran managers can stumble, but there are many ways to research a new fund before you decide to add it to your portfolio.

Managers Start by doing research about the fund manager. How long has the manager been in business? How much of that time was spent running a strategy that is similar to the new fund? Was the previous fund successful?

You’ll also want to find out how long the manager has been with his or her current employer. If the manager has had a long tenure with the organization, what role did he or she play before taking over the fund? Has the manger been in the business long enough to have seen both bull and bear markets? Determining the answer to these questions will help you figure out whether an experienced manager is running the show, an experienced assistant manager is now taking the helm of his or her own fund, or if a true rookie is making a debut.

Fund Complexes Next, thoroughly review information about the fund complex. Is the rookie fund the latest product from a reliable old fund complex? Does the organization have a long history with the type of strategy the new fund offers? Many firms specialize in small cap, growth, value, socially responsible and other strategies, and have strong track records of launching successful offerings. In many cases, a new fund is managed in a manner similar to an existing product.

When a new fund is similar to an existing strategy, the name of the new fund sometimes provides insight into this type of scenario. Names, such as Large Cap Growth I and Large Cap Growth II generally denote situations where strategies are similar. You’ll want to know if the fund complex has a good track record of launching funds that last, and whether they have historically lowered fees as assets under management have risen.

The Fund The fund itself is also a valuable source of information. To learn about the fund, read the prospectus and check the fund’s track record – even if it’s short. How did it fare against its benchmark in terms of returns, alpha, beta and turnover? Does the fund’s history demonstrate a rigorous adherence to the stated investment strategy? Are the fees high or low when compared to similar, competing funds?

The Bottom Line While time-tested strategies and tenured managers appeal to the risk-averse among us, the opportunity to take a chance on a rookie in the hope that you find the next all-star player can be a power draw. If you can resist the urge to take a chance, be sure to thoroughly research the fund before investing.

If you do all of the research that you can and still like what you see, it could be time to put down the money to invest in a few shares of the fund. Adding a rookie fund to your portfolio should, like all risky moves, be done in moderation. Put a small amount of your assets in the fund as part of a well-diversified portfolio. If the manger does well, you will enjoy the gains. If the manger doesn’t do well, the bulk of your portfolio will not be exposed to the damage.

Since their creation, mutual funds have been a popular investment vehicle for investors. Their simplicity along with other attributes provide great benefit to investors with limited knowledge, time or money. To help you decide whether mutual funds are best for you and your situation, we are going to look at some reasons why you might want to consider investing in mutual funds.

Diversification One rule of investing, for both large and small investors, is asset diversification. Diversification involves the mixing of investments within a portfolio and is used to manage risk. For example, by choosing to buy stocks in the retail sector and offsetting them with stocks in the industrial sector, you can reduce the impact of the performance of any one security on your entire portfolio. To achieve a truly diversified portfolio, you may have to buy stocks with different capitalizations from different industries and bonds with varying maturities from different issuers. For the individual investor, this can be quite costly.   By purchasing mutual funds, you are provided with the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. One caveat, however, is that simply purchasing one mutual fund might not give you adequate diversification – check to see if the fund is sector or industry specific. For example, investing in an oil and energy mutual fund might spread your money over fifty companies, but if energy prices fall, your portfolio will likely suffer.

Watch: Mutual Funds

Economies of Scale The easiest way to understand economies of scale is by thinking about volume discounts; in many stores, the more of one product you buy, the cheaper that product becomes. For example, when you buy a dozen donuts, the price per donut is usually cheaper than buying a single one. This also occurs in the purchase and sale of securities. If you buy only one security at a time, the transaction fees will be relatively large.   Mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges. Imagine if you had to buy the 10-20 stocks needed for diversification. The commission charges alone would eat up a good chunk of your savings. Add to this the fact that you would have to pay more transaction fees every time you wanted to modify your portfolio – as you can see the costs begin to add up. With mutual funds, you can make transactions on a much larger scale for less money.

Divisibility Many investors don’t have the exact sums of money to buy round lots of securities. One to two hundred dollars is usually not enough to buy a round lot of a stock, especially after deducting commissions. Investors can purchase mutual funds in smaller denominations, ranging from $100 to $1,000 minimums. Smaller denominations of mutual funds provide mutual fund investors the ability to make periodic investments through monthly purchase plans while taking advantage of dollar-cost averaging. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds. This provides an additional advantage – liquidity.

Free Trading Guide   Liquidity Another advantage of mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time without there being much difference between the sale price and the most current market value. However, it is important to watch out for any fees associated with selling, including back-end load fees. Also, unlike stocks and exchange-traded funds (ETFs), which trade any time during market hours, mutual funds transact only once per day after the fund’s net asset value (NAV) is calculated.

Professional Management When you buy a mutual fund, you are also choosing a professional money manager. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund’s money manager to handle it for you.

The Bottom Line As with any investment, there are risks involved in buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Also, the advantages gained from mutual funds are not free: many of them carry loads,Get Cash For Gold , annual expense fees and penalties for early withdrawal.

There are five main indicators of investment risk that apply to the analysis of stocks, bonds and mutual fund portfolios. They are alpha, beta, r-squared, standard deviation and the Sharpe ratio. These statistical measures are historical predictors of investment risk/volatility and are all major components of modern portfolio theory (MPT). The MPT is a standard financial and academic methodology used for assessing the performance of equity, fixed-income and mutual fund investments by comparing them to market benchmarks.

All of these risk measurements are intended to help investors determine the risk-reward parameters of their investments. In this article, we’ll give a brief explanation of each of these commonly used indicators.

Alpha Alpha is a measure of an investment’s performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its “alpha.”

Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio’s return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. For investors, the more positive an alpha is, the better it is.   Beta Beta, also known as the “beta coefficient,” is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment’s return to respond to swings in the market. By definition, the market has a beta of 1.0. Individual security and portfolio values are measured according to how they deviate from the market.

A beta of 1.0 indicates that the investment’s price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment’s price will be more volatile than the market. For example, if a fund portfolio’s beta is 1.2, it’s theoretically 20% more volatile than the market.

Conservative investors looking to preserve capital should focus on securities and fund portfolios with low betas, whereas those investors willing to take on more risk in search of higher returns should look for high beta investments.   R-Squared R-Squared is a statistical measure that represents the percentage of a fund portfolio’s or security’s movements that can be explained by movements in a benchmark index. For fixed-income securities and their corresponding mutual funds, the benchmark is the U.S. Treasury Bill, and, likewise with equities and equity funds, the benchmark is the S&P 500 Index.

Forex Trading – GFT   R-squared values range from 0 to 100. According to Morningstar, a mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index.

Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being “closet” index funds. In these cases, why pay the higher fees for so-called professional management when you can get the same or better results from an index fund?

Standard Deviation Standard deviation measures the dispersion of data from its mean. In plain English, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.

Sharpe Ratio Developed by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting the risk-free rate of return (U.S. Treasury Bond) from the rate of return for an investment and dividing the result by the investment’s standard deviation of its return.

The Sharpe ratio tells investors whether an investment’s returns are due to smart investment decisions or the result of excess risk. This measurement is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment’s Sharpe ratio, the better its risk-adjusted performance.

The Bottom Line Many investors tend to focus exclusively on investment return, with little concern for investment risk. The five risk measures we have just discussed can provide some balance to the risk-return equation. The good news for investors is that these indicators are calculated for them and are available on several financial websites, as well as being incorporated into many investment research reports. As useful as these measurements are, keep in mind that when considering a stock, bond or mutual fund investment, volatility risk is just one of the factors you should be considering that can affect the quality of an investment.

by

Richard Loth

When you purchase a mutual fund, you delegate the voting authority on the shares of underlying companies in the fund to the fund managers. Historically, this wasn’t an area where investors paid much attention, trusting the fund and the companies they invested in to do the right thing on behalf of shareholders.

In this article, we show you how to determine whether your mutual fund managers are acting in your best interests and in line with your beliefs.

SEE: 5 Ways To Measure Mutual Fund Risk

Do You Know? Do You Agree? Does It Matter? Do you know what your money is supporting? For the vast majority of investors, the answer is “No.” Their understanding of their investments is often limited to whether the investments have generated positive or negative returns. For those who do care, the sheer size of mutual fund investment portfolios, with a single fund often holding hundreds of positions, makes it difficult and time consuming to look at the way the fund voted on each of its underlying shares. Keeping in mind that each underlying company may have had three, four, five, or more issues to vote on, and the math multiplies rapidly.

Numbers like this raise the question of whether, if you do care about whether your mutual fund supports your beliefs – you can even have an impact. The short answer is “maybe.” For example, you could purchase stock in individual companies in order to retain your proxy voting rights. This would require that you conduct a significant amount of research on an ongoing basis, construct and maintain a portfolio with the proper asset allocation, learn about the proxy issues, and then cast your vote. However, your vote may mean little in the face of the proxies cast by the major institutional investors and mutual fund companies, which often have significant volumes of a particular company’s stock.

To up the ante, you could submit a shareholder proposal to the company, requesting a vote on the issue of your concern. While the company is likely to recommend against your proposal and galvanize institutional investors to back their position, this tactic has been used to at least elevate a variety of shareholder concerns to the attention of the board and other shareholders. In some cases, companies have even responded by agreeing to take certain steps, such as studying the feasibility of a particular issue, in order to get such proposals rescinded. Of course, this effort requires a significant amount of work.

The Issue From a practical corporate governance perspective, investors want to know whether the fund in which they invest supports the best interests of shareholders, such as policies for expensing stock options, the manner in which the board of directors is chosen, the adoption of poison pills, shareholder approval of golden parachute executive compensation plans, separating CEO and chairman positions, non-discrimination policies, and executive compensation and conflicts of interest (such as voting with management to get a shot at managing pension funds). For related reading, see Governance Pays.)

Free Trading Guide   The good news for investors is that there are some requirements that shed some light on the issue and provide greater clarity for mutual fund shareholders.

The SEC Provides Guidelines In 2004, the Securities and Exchange Commission (SEC) required that fund companies disclose proxy votes, voting guidelines and conflicts of interest in the voting process. All funds must make these disclosures to the SEC through an N-PX filing, which must either be available to shareholders on the fund company’s websites or upon request by telephone. You can also find your fund’s N-PX filing on the SEC website.

The N-PX filing will show how the fund voted on proxy issues, detailing whether the issue was recommended by management or shareholders, how the fund voted and what management’s recommendation was. However, the filing will not provide all of the details behind each proxy vote, so you will need to cross reference the vote against the company’s proxy statement.

Fund companies must also disclose the policies and procedures used to determine how the fund will vote on corporate issues. This information is also available from each fund company in a myriad of forms, including through the fund’s “statement of additional information,” in its semi-annual or annual reports, as well as by telephone request.

By looking at the fund company’s voting record and its policies, fund holders can get a general idea of how the company votes on key issues and if its votes are in line with the best interests of shareholders.

Socially Responsible Funds A relatively new solution to the problem of monitoring investment managers and how they act on behalf of investors is the creation of socially responsible funds. These funds view successful investment returns and responsible corporate behavior as going hand in hand.

For example, Domini Social Investments was the first fund company to publish its voting record and did so in 1999 – five years before the SEC mandated such disclosure. Today, socially responsible mutual funds provide easy access to detailed information about their investment philosophies and structure their portfolios accordingly. This information makes it easy for investors to choose a fund that matches their beliefs.

Use Your Money to Shape Your World Whether you conduct your own research, read reports distributed by a variety of organizations dedicated to socially responsible investing or choose socially responsible mutual funds, putting your money where your conscience is has never been easier. With just a little bit of extra effort, you can ensure that your mutual fund manager is acting in a similar manner to how you would act. If this isn’t the case, look on the bright side: there are thousands of funds to choose from.