Download Reading Ch 2 A Tycoon Of The MUTUAL FUNDS

A Tycoon Of The MUTUAL FUNDS
Winston Smythe Kennsington III -- our second-estate financial maestro -- has given me a hot,
and I mean REALLY HOT, investment tip. Waldo Industries, the parent company of Waldo's
TexMex Taco World, is making plans to expand its franchises. Marketing studies show that
people are ripe and ready for Waldo's Super Deluxe TexMex Gargantuan Tacos beyond the
confines of Shady Valley. For a minimal investment, I can grab a share of this money- making
opportunity. A minimal investment to our Ivy-League friend Winnie is $500,000.
Unfortunately my bank account, including recent deposits of loose change found on our
pedestrian trek, is a few zeros short. Is this another sure-fire financial opportunity that will
pass me by?
Money Begets Money
It seems as though the only way to make a gadzillion dollars by investing in financial markets,
including the likes of the stock market, is to start with a gadzillion. Card-carrying members of
the third estate, with limited financial assets, find it difficult to play the game like Winston
Smythe Kennsington III and his second-estate gadzillionaire cohorts.
It's an unfortunate fact of life that Winnie and his second-estate cohorts can make their
gadzillions grow like mold on month old bread. Most members of the third estate, without
gadzillions, don't quite have the same chance. Here a few notable reasons why:
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Information. Risk and uncertainty are the hallmarks of the financial markets. But, as
we saw in Fact 6, Our Unknown Economy, the information needed to reduce risk and
uncertainty is costly to get. The greater your wealth, the more information you can
have at your disposal. The second estate employs many financial advisors who spend
their entire lives searching for the best ways to turn one gadzillion dollars into two
gadzillion dollars.
Transactions Costs. Moving your investments through the maze of financial markets,
buying here and selling there, rings up brokerage fees, telephone expenses, and
assorted costs. Those costs, however, are much smaller relative to a $10 gadzillion
investment than a $137.65 investment. Relatively less is eaten up by transactions costs
if gadzillions are invested.
Diversify. Risk and uncertainty also make diversification a wise investment technique.
It's much easier to diversify into dozens of different investments with $10 gadzillion
than it is with $137.65. Some investments, like Winnie's tip on Waldo Industries, need
a minimum "entry fee" so to speak. You can't diversify if you have enough for only
one investment.
Enter Mutual Funds
While the second estate might dominate in terms of total dollars in the financial markets of
our economy, the third estate actively participants. The primary function of financial markets
is to match up lenders with borrowers. In many cases, the lenders are members of the third
estate with a few bucks and the borrowers are the businesses of the second estate aiming
toward investment.
Banks and insurance companies, play a big part in accumulating funds from the third estate
and making them available to second estate. However, they're somewhat limited in how they
use the third estate's accumulated funds. For example, banks don't fiddle around in the stock
market.
Wouldn't it be great if the members of the third estate, even though we might not have
gadzillions to invest, could gain direct access to some of the highest-return financial markets?
Wouldn't it be nice if I could somehow get in on Winnie's hot tip on Waldo Industries even
though I don't have a big initial investment? Here's a thought. If I teamed up with a couple of
hundred other pedestrians, then together we might have enough for Winnie's money- making
investment.
This is, in essence, the objective of mutual funds. They give investors with small bank
accounts the opportunity to participant in various financial markets that would be out of reach
otherwise.
A mutual fund works like this: A mutual fund company administers the combined investment
dollars accumulated from thousands of consumers. Because the mutual fund has gadzillions to
invest, rather than mere thousands, it operates just like any really wealthy member of the
second estate -- better information, lower transactions costs, and a great deal of diversification.
In that a mutual fund provides fewer services than banks, it also has fewer expenses. The end
result is that investors get higher returns.
All Sorts of Mutual Funds
As most daily newspapers show, there are hundreds of mutual funds offered by a multitude of
different mutual fund companies. What the newspaper doesn't show is that different mutual
funds usually pursue different objectives. If you're contemplating the mutual fund route with
any of your spare change, you need to get a good handle on these objectives. A few of the
common ones are:
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Liquidity. Several sorts of mutual funds put their funds into so-called money markets,
which deal in short-term Treasury bills, commercial paper and the like. These act
much like savings accounts (but pay a higher interest rate) with the goal of keeping
funds liquid, or easily transferred into other funds.
Bonds. A popular investment of mutual funds is the wide assortment of long-term
corporate bonds, Treasury bonds, and municipal bonds. Some of these funds,
especially those for municipal bonds, can provide tax- free interest. However, be sure
to read all of the fine print to see if you qualify.
Growth. These search out stocks that are most likely to experience a rapid price
increase. The basic philosophy here is to buy low and sell high. Of course, this tends
to be very risky because it seeks out the short-run ups and downs of the financial
markets. Be careful with these.
Income. These funds relay primarily on quarterly or annual dividends or returns paid
on stocks and/or bonds. The goal here is more long term, secure investments that
prosper along with the long-term growth of the economy.
Growth and Income. These funds seek balance the risk of high- growth stocks with
the returns from more secure, long-term growth of stocks and bonds. They're not a bad
sort of general mutual fund investment.
Commodities. Some mutual funds invest exclusively in gold, silver, farm products, or
other commodities. As such, they perform right along with these commodities, which
means you can stand to gain or lose a lot.
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Inte rnational. A number of mutual funds buy nothing but stocks and/or bonds from
another country or group of countries. These funds gain or lose with the growth or
decline of the country or countries. The exchange rate is also important for these funds
(see EXCHANGE RATE).
Selected Industries. Many mutual funds invest exclusively in the stock of a particular
industry, such as health care or telecommunications. A fund's performance is tied
directly to the profitability of the underlying industry.
Tips for the Mutual Fund Tycoon
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Some mutual funds are better than others. In addition to differences in what the funds
try to do, there are differences in how well they do it. Some pay high returns and have
low administrative costs, and others don't.
Several consumer and business publications provide annual mutual fund evaluations.
Check them out before jumping into the mutual fund ballgame. It's worth the effort to
do a little research before investing.
Every mutual fund, by law, provides a prospectus to potential investors that outlines,
in some detail, the goals, structure, fees, and types of investments of the fund. This is
something that you want to read carefully before investing.
Overall, mutual funds are a viable investment and saving option for anyone without a
lot of extra money. Many funds require no more than a few hundred dollars to open.
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