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A Guide to Mutual Fund Basics – HULT Private Capital

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A Guide to Mutual Fund Basics – HULT Private Capital

February 18
23:06 2021
These popular investment vehicles have been around for over two hundred years and have served many well – as explained by HULT Private Capital’s Mark Hudson.

The right Mutual Fund

It is believed that the early version of these globally popular investment portfolios originated in the late 1700s in Europe. By 1880 the first U.K. version was created. Though the structures have changed the original purpose has not, a way for small investors to participate in a diversified portfolio.

For many people mutual funds are a cost effective way to gain access to professional money management and to build out a well-diversified portfolio. Massachusetts Investors Trust, created in the U.S. in 1924, was the first of the modern day versions. Mutual funds have now developed to into specific objectives like capital growth, a focus on dividends or even corporate bonds. These securities can be used to develop a well-diversified portfolio.

When to invest?

Investing involves risk so there are steps everyone should take before they invest. The first thing anyone should do is to establish a budget. Investors must live within their means. To quote directly from Lewis Hill of HULT Private Capital: “The very first thing on an investors mind should be to place 10% of income going directly to savings. If an investor has not already established an emergency fund, it should be done next. Set aside six months of expenses”.

Investors emergency fund should be in a stable account that doesn’t have the volatility of stocks and bonds. By using a checking account, savings account or money market, it won’t make much interest but keeps investors protected from market risk. An emergency fund will protect an investors if something goes wrong and money is required at a time when the invested mutual funds are locked. The age-of-coronavirus is the best example seen.

Consistent monthly purchases of fund shares are well suited for mutual funds. It may seem hard to stay committed to regular investing during volatile times in the markets like we have seen in the past year. “The best time to buy is when there is blood in the streets. Even when that blood is your own.” Sir Barron Rothschild. “Be fearful when others are greedy and greedy when others are fearful.” Warren Buffet. These two well-known investors made billions for themselves with these approaches to investing. Both sayings are just another way to phrase “buy low, sell high.”

The COVID-19 pandemic has disrupted markets. After a sharp decline the FTSE has partially recovered, but still experienced above average volatility. Remember, that every time a frightened investor sells at a low price, a shrewd and confident investor is there to buy at a bargain. Like all market disruptions, this one will one day be in the review mirror, too. Right now it provides investors willing to listen to the buy low sell high philosophy an opportunity that they may not see again.

Fund Objectives

A fund’s objective is described in its prospectus. An objective lays out what type securities it will buy, what mix it will have, what distributions it will pay and so forth. Mutual fund management teams usually stay invested regardless of market conditions. It is up to the investor or advisor to determine if one should be in or out of the market.

The following definitions are but a few examples and come from the Investment Company Institute. Capital appreciation funds seek growth of capital; dividends are not a primary consideration, Growth funds invest primarily in common stock of growth companies, which are those that exhibit signs of above-average growth, even if the share price is high relative to earnings/intrinsic value, Investment Grade Bond funds seek current income by investing primarily in investment grade debt securities.

Each investor’s portfolio should have a reasonable mix of funds with different objectives to create diversified asset allocation. Over-weighting in funds with similar objectives like Capital Appreciation, Growth and Domestic Equity would not be considered diversified because all three are similar. A better example of diversification would be Growth Stocks, Value Stocks and Government Bonds. Growth and Value stocks have a history of negative correlation, meaning that when one goes up the other goes down. Stocks and bonds have the same negative correlation history.

With a well-diversified portfolio, the plan is that whatever the market condition, business event or political news that causes one part of the portfolio to go down will cause another to go up thereby creating balance and smoothing out volatility.

Expense Ratio

Regardless of what type sales charge is best for one, all fund managers are compensated for managing the assets. The fund pays a small percentage each year to the management team. In addition the fund has other expenses. All of these fees combined are known as the Expense Ratio. There is no significant difference in the expense ratios because of load or no-load status. Expense ratios have consistently fallen over the past two decades as investors have sought out lower cost funds. Recent reports show average expense ratios of equity funds at 0.63 or 63 cents annually for every $100 invested. Bond funds and passive funds will cost less while global and small cap funds will often cost more.

Rankings, Ratings and Advertisements

Where mutual funds rank compared to their peer group can be helpful, but can be misleading if one don’t understand how the system works. Be cautious of mutual funds that tout themselves as #1 in a sector. Sometimes that means the fund went up in value more over the past year than its peers. What are the chances that it will repeat? One should evaluate the fund based on a three or five year average. For a fund that has performed well in longer time frames, investors also need to evaluate if the same management team that turned in those results is still in place. The best evaluation, is whether the fund’s return is better than its risk. One should ask if the fund consistently have an above average return with a below average risk, for example. Such profiles usually indicate capable managers.

Determining which investments are appropriate for an individual investor will depend upon the investment objectives and risk tolerance and should be discussed with one’s financial advisor before implementing any investment plan.

For information when investing contact:

HULT Private Capital

The Investment Team – Mark Hudson

Email: [email protected] 



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