Category Archives: Mutual Funds

Best Vanguard Mutual Funds For Beginners 2013

Good choice! Investing in Vanguard Funds is a good place to start your investing career. To start, you need to understand what your investing objectives are. For this article, I am going to make several profiles with various assumptions:

Young Professional:

  • You are a young person 25 to 29 years old.
  • You have job and can invest $100 per month after all bills and living expenses are taken care of.
  • Your job has a 401K and you are contributing for retirement
  • You have saved $3000 to invest in a mutual fund.
  • Your goal is to build additional capital for investing
  • Your risk tolerance is high

For this type of investor, an aggressive stock fund would be the way to go. They have all their bases covered and are trying to build wealth. The $3000 is the minimum needed to get into various stock funds that will provide a higher rate of return.

I would suggest the following five funds to pick from. Depending on what the individual preference is, any one of the five will meet the objectives of starting with an aggressive fund.

  • Vanguard Capital Opportunity Fund – Mid growth stock fund with high risk (5 on a scale of 5). Currently has 120 stocks with 36.95% in Healthcare.
  • Vanguard Dividend Growth Fund– Large Blend stock fund with moderately high risk (4 on a scale of 5). Currently has 50 stocks, 19.14% in Industrials, 18.21% in Healthcare and 15.27% in Consumer defensive.
  • Vanguard MidCap Growth Fund – Mid-growth stock fund with high risk (5 on a scale of 5). Currently has 121 stocks, 23.62% in Industrials, 20.24% in consumer cyclical and 18.30% in Technology.
  • Vanguard Small-Cap Value Index – Small value stock fund with high risk (5 on a scale of 5). Currently has 1004 stocks, 22.67% in financial services, 16.41% in Real Estate and 16.05% in Industrials.
  • Vanguard Strategic Equity Fund – Mid blend stock fund with high risk (5 on a scale of 5). Currently has 420 stocks, 18.19% in Industrials, 15.12% Consumer cyclical and 12.17% in Financial services.

Putting $100 a month into one of the above funds, after two years of investing, contact Vanguard to see about diversifying into another fund. They will be on their way to building a substantial wealth base.

Late Bloomer:

  • In your 40’s.
  • Have saved some money – $5000
  • Monthly bills and mortgage leaves you with $100 a month to add to savings.
  • Starting to wonder about retirement and how to save for it.
  • Risk tolerance is moderate.

For this type of investor, a balanced fund would be ideal as you have some growth and risk, but there is a stable income from bonds. Here are the five funds I would suggest picking from. Note: all suggested funds have moderate risk (3 on a scale of 5).

  • Vanguard Wellesley Income Fund – Balanced fund with an expense ratio of 0.25%. Currently has 64 stocks (13.30% of assets invested in the top ten stocks), 16.47% in Industrials, 16.37% in Consumer defensive and 14.56% in Healthcare. Current number of bonds – 696 with an average maturity of 9.4 years and average coupon of 3.9%.
  • Vanguard Wellington Fund – Balance fund with and expense ratio of 0.25%. Currently has 102 stocks (16.40% of assets invested in the top ten stocks), 18.24% in Financial services, 16.11% in Healthcare and 13.45% in Industrials. Current number of bonds – 599 with an average maturity of 9.2 years and average coupon of 3.9%.
  • Vanguard Star Fund – Balanced fund with expense ratio of 0.34%. Currently has 8 investments. Note, this fund currently has 62.80% of monies invested in the following Vanguard Funds:
    • Vanguard Windsor II
    • Vanguard International Growth Fund
    • Vanguard International Value Fund
    • Vanguard Windsor Fund
    • Vanguard PRIMECAP Fund
    • Vanguard Morgan Growth Fund
    • Vanguard U.S. Growth Fund
    • Vanguard Explorer Fund
  • Vanguard Balanced Index Fund – Balanced fund with an expense ratio 0.24%. Currently has 3141 stocks (8.80% of assets invested in the top ten stocks), 16.71% in Technology, 13.59% in Financial services, and 12.17% in Industrials. Current number of bonds – 4521 with an average maturity of 7.2 years and average coupon of 3.4%
  • Vanguard Life Strategy Mod Growth – Balanced fund with an expense ratio of 0.16%. This fund has 60% of its assets invested in the Vanguard Total Stock Market Index Fund and the Vanguard Total International Stock Index Fund. This fund is an “index fund” of index funds. 40% of the fund is invested in bonds.

As you can see, the above funds will allow you to gain growth with some steady income from bonds. I would recommend the STAR Fund as a first investment. They will open it with $1000. You can then choose to pick another fund – I would suggest the Wellington Fund as is weighted more in stocks (66.72%). With purchasing two funds, you can add to each and still get a good diversified portfolio.

Going into Retirement:

You are about to go into retirement. You need to save and invest your capital so you can have a steady income for the rest of your life. Often this comes from the sale of your home or other assets. Purchasing an annuity or annuities is a way to take the burden of managing your assets long term and have a guaranteed income.

Vanguard offers annuities that can give you guaranteed payments, guaranteed payments with growth potential and ones that provide steady income, growth potential and market protection.

For every beginning investor, the most important thing is to get started. The sooner you start your money working for you, the better.

Best Mutual Funds For Beginners 2013

What are the best mutual funds for beginners? That is a very complex and daunting question. To come up with the right answer for you, certain questions need to be answered first. Then, basic criteria should be used in making a decision.

The first question for you to answer is what type of investing do you want to use the mutual fund for? I will eliminate those who are participating in a company sponsored investment program. If you are fortunate to have a 401K offered where you work, be sure to participate. Your company should also provide information and advice to help you make the appropriate selections for you. Take advantage of the services that are offered.

Most beginners want to invest in mutual funds to get their feet wet in the investment arena and minimize the risk of losing capital. This is a wise move, as educating yourself about how mutual funds are set up and how they do their investing will provide knowledge that can transfer to stock investing.

One of the drawbacks to mutual funds is the expense load they charge. This is to cover the management of the fund and bookkeeping. This charge can range from 0.19% to 2.00% or more. This will eat into your return. I will address this later.

The motivating factor should be to save money and have it grow with small risk. Some funds allow you to start investing with as little as $500. However, your investing timeline will drive some of your choices. Each mutual fund has certain characteristics and objectives they strive for. They usually fall under the following categories:

  • Index – matches shareholding of a specific index like the S&P 500 or the Dow Jones. These funds match the overall market performance
  • Sector – concentrates stocks from companies in a specific sector of the economy. Examples include transportation, health, energy, and consumer goods. Results from these types of funds can vary widely and is dependent on the overall conditions of the economy.
  • Global/International – these funds focus on international companies, although they may include some US based companies. These tend to be more volatile than funds with only US stocks.
  • Bond – these funds are made up of bonds and are usually called fixed-income funds. They target interest income.
  • Balanced – these type of funds have a mix of stocks and bonds. They strive for a more stable return.

Now that we know the various categories of funds, we now need a way to narrow down your selection. The following

Criteria are key to helping you make the selection.

  • Consistency with your investment goals – do you have issues with investing in oil companies? What about tobacco producers or casinos? Do you have issues with major agribusiness. If you do, investing in mutual funds will be difficult. The whole purpose of mutual funds is to diversify the risk. This is done by investing in a lot of different companies. It is up to you to make sure you know what companies/industries your fund is investing in and you are comfortable owning part of those companies.
  • Fund strategy – is the fund strategy of colleting interest and preserving capital at all costs what you want? This will limit your return, but minimize the risk of losing your initial capital. Are you a risk taker? Then a Global or International Fund may be what you are looking for. They can have a higher rate of return, but there is a greater risk of losing some of your capital.
  • Volatility – slow and steady or peaks and valleys? My recommendation for beginners is to have low volatility in the fund you choose. Until you have some investment experience, and get comfortable with volatility, stay away from it.
  • Tax efficiency – for most beginners, this will not be an issue.
  • Manager tenure/turnover – look for funds that have management that has been with the fund over 5 years, better yet, over 10 years. This is an indicator the fund will continue the same investment patterns and should achieve similar results as in the past.
  • Fund Fees – this is the biggie. The lower the expense load, the more money you get to keep. As a rule of thumb, look for a fund that has an expense load of 1.50% or less. If it is going to cost you more, then make sure you understand why the fees are higher and are you going to get additional returns. Also, look for funds that are no-load. No-load funds do not have a sales charge.

One of the best places to do your research is at the Morningstar website. Sign up and you can use their free screener to help you find the mutual fund that is right for you.

If you are overwhelmed with information, then I have a recommendation. Go to the Vanguard site or Fidelity site. Both have friendly websites and are used to dealing with new investors. Both have low fees and a variety of funds to choose from.

Depending on the amount of money I had to invest, going with one or two Vanguard or Fidelity funds would be the way to go. The Vanguard STAR Fund has a $1000 minimum to invest, 0.34% expense ratio and good performance. Fidelity has about 10 funds that are candidates for investing. Most start with a $2500 minimum and the expense ratios are closer to 1.0%. My preference would be to start with Vanguard. They have the lowest fees and have been around a long time.

Key to successful investing is to make sure you understand what risks you are taking and how much you are paying for the services being provided. Starting with Vanguard or another large fund that deals with new investors is the best place to start. They will help you with your education.

What is an expense ratio for mutual funds – Expense ratio definition and formula 2013

Low cost index funds and ETF’s are a rage and the concept was pioneered by John Bogle. Before that mutual funds had heavy expense ratios that they charged to the customer.

What is an expense ratio – The expense ratio is an indicator of the expenses that an investment company incurs for the management of the fund. The way it is calculated is that annually the fund takes stock of its operating expenses and these are then divided by the assets under management. The way it is charged to the investors is that this expense is taken straight out the assets under management essentially translating into a lower return for the investors.

 Why it is required – To run the fund , the fund company requires to pay the salaries of the fund managers, legal bills, costs of running the fund, record keeping expenses, auditing expenses etc. These several things are required to be paid by the fund to run a mutual fund. Remember that running a mutual fund will mean fund mangers, research analysts on the fund. These analysts look at companies to invest and believe me that these do not come cheap. That is why it ETF’s generally have lower expense ratios as the running of these low cost options do not require a team of analysts as such. These ETF’s just mirror the index that they are following and do not have team of analysts pouring of research reports to pick a stock. ETF’ and low cost index fund can hence easily charge low expense ratios.


Low cost vs high expense ratios examples

Here are some comparisons of the low cost options versus the high cost mutual funds.

Typically all the actively managed mutual funds will be having higher expense ratios and they will have to charge that to customers to pay for the experts who are trying to beat the index.


Low cost ETF and index funds

 Vanguard 500 – It has an expense ratio of 0.12%. This is low however it is still higher than a new S&P 500 ETF that Vanguard launched and that has an expense ratio of .06%.

 Spartan 500 index fund from Fidelity – This Spartan fund has an expense ratio of 0.05% beginning Dec 2012. This is for the Advantage series where the minimum amount that is required to be invested is $10000. However that is the lowest expense. In fact Schwab has one where it is charging 0.04% expense ratio.

High Expense ratio

Now look at the Fidelity Advisor Biotechnology Fund and it has an expense ratio of 1.6%.

Another that has expense ratio high enough is Fidelity Select Construction and Housing Portfolio. This has an expense ratio of 0.96%