What are Equity Funds?

Equity funds are a type of mutual fund that invests primarily in stocks. Often referred to as “stock funds,” this type of mutual fund is categorized based on a number of factors, such as whether it is based on international or domestic investments. For example, some funds may be based on investments from a single country, while others may focus on a broader or even narrower market. There are also stock funds that focus on specific business sectors. Equity funds are also categorized based on the overall investment style of the fund’s holdings or the company size, which is why they are often referred to as small, mid or high cap funds. Because of the focus on stock investments, equity funds provide a greater amount of risk as compared to safer investments such as bonds. As such, they are a good choice for some investors, while being a bit too risky for others.
Understanding Equity Funds
An equity fund will usually mirror the ups and downs of the overall stock market. Of course, the overall profitability of the fund will depend on the performance of the actual stocks included in the fund, but during an overall “down” market, you can expect loses. The stock mix is important when investing in an equity fund. A fund that includes a broad diversity of stocks is usually considered to be less risky than those which contain stocks from a narrower market. It’s also important to factor your entire portfolio into the decision to invest in equity funds. For example, if your investment portfolio also includes other safe investments such as bonds, you might want to increase your profit-making potential by investing in a higher-risk equity fund. However, if your investment portfolio is less diverse, you will probably want to stick with equity funds that are designed to produce only a medium level of risk factor. Overall, equity funds are a good way of maximizing investment profit potential, while still experiencing less risk than investing in an individual company’s stock. Different equity funds also have different risk management strategies. A fund with an aggressive risk management strategy may experience less of a loss during a down market as compared to the overall market. However, in most cases, equity funds have only a moderate amount of risk management, which means they will closely mirror the ups and downs of the overall market.
Choosing the Right Equity Fund
Although there probably isn’t an absolute “right” or “wrong” equity fund, there are those which may be more advantageous for your individual investment strategy. An equity fund that invests in smaller companies that use their earnings for growth instead of dividends tends to be more risky. These funds are usually referred to as “aggressive growth” or “Small Cap” funds. There are also equity funds which invest in companies which are expected to grow at a steadier and slower pace, which are referred to as “long-term growth” or “High Cap” funds. Depending on your investment needs and the rest of your portfolio, you’ll need to evaluate the potential for larger returns against the inherent risk factors.

What are Global and International Funds?

Global and international funds are mutual funds that focus on investments in other countries. These funds can offer more diversity than those which focus only on the investment opportunities in one’s own country. However, along with the additional opportunities, there is also additional risk in the form of economic instability, political issues, and fluctuations in currency. There is often some confusion about the differences between a global and an international fund. Basically, an international fund does not include investments from the investor’s own country, while a global fund does.
Understanding Global Funds
Global funds include investments such as stocks or bonds from throughout the world. These include investments from the investor’s own country. Many investors feel that these funds provide more opportunity for returns, since they can provide an additional level of diversity to a portfolio. However, before investing in a global fund, it is important to understand the additional volatility that these funds can be subject to, because of changes in the economic, political and social climates within any of the countries represented in the fund. The commonly held belief that a global fund is inherently riskier than a domestic fund in every circumstance is not true. Risks exist in any investment, so when choosing a global fund, it’s important to look for one with a reasonable level of risk. However, this is also the case with domestic funds. If you are looking for a fund that provides a good mix of investment opportunities, including those from your own country, a carefully selected global fund could be a good addition to your portfolio.
Understanding International Funds
The term “international fund” is used to describe mutual funds that do not include investments from the investor’s own country. These funds invest in a variety of companies from throughout the world. However, in the case of an investor located in the United States, there would not be any United States companies in the mix. An international fund is a good way of getting some investment exposure to the global market. If your portfolio focuses only on investments from your own country, an international fund can provide some beneficial diversity. However, there are other factors to take into consideration when choosing international funds, such as the economic, social and political situation other countries. Additionally, not all countries have the same level of control standards and supervision as the United States does. As a result, some people feel that it is more difficult to choose good investments in other countries as compared to their own. However, international funds are a good opportunity to invest in emerging markets in developing economies, which can offer significant opportunities for growth.
Currency Risk
Currency risk can be of particular concern, because companies usually pay capital gains and dividends in their own local currency. If a foreign currency is stronger than the investor’s home currency, the investor will benefit. However, if the home currency is stronger than the foreign currency, the investor’s returns will be negatively impacted. For this reason, it’s important to take the currency exchange rates into consideration when choosing international funds.

How to Pick a Mutual Fund

If you’re interested in buying a mutual fund, there are several ways to go about it. In some cases, you can purchase these funds by directly contacting a fund company. In other cases, you’ll need to go through a bank, insurance agent, broker or financial planner to make your purchase. There are also programs that offer a variety of different funds, offered from many different companies, offering a “no transaction fee” method of purchase. Before making a purchase, it’s important to understand the processes that are involved, and what your options are.

Taking the First Step

Just as with many other things in life, the biggest step you’ll take with mutual funds is actually purchasing the first one. Investing is one of those things that can be easy to put off. Although you should take care to make the best possible decision when investing, almost any mutual fund investment would be a better option than making no investments at all. So, don’t put off your purchase just because you feel a bit unsure of yourself.

Investing in Your First Mutual Fund

Low cost and a good level of diversification are two important factors to consider, especially if you are investing in your first mutual fund. Many first-time investors find that they feel most comfortable with an S&P 500 index fund. These funds have low costs and a wide amount of diversification, both of which are good things. Investing in a mutual fund that actually owns other funds is another popular method, especially for first-time investors. These funds consist of a mix of bond funds and stock funds, both foreign and domestic. Based on the number of years you have until your retirement, you simply pick the appropriate fund. Although this can be a very easy method of investing, the ease also translates into a lack of control and options in regards to the funds. However, this is often a good thing for the inexperienced investor. The most important thing is to understand your personal financial goals, so that you are able to find a fund that is a good solution. For example, a short-term goal such as paying for a child’s college education might be a good match for a money market fund, while a long-term goal such as retirement may be better suited to stocks funds. If you are primarily concerned about the costs associated with investing, then an index fund could be a good choice. It’s also important to know your own risk tolerance, so that you can choose between a conservative or riskier approach.

What to Look for in a Mutual Fund

If want to start investing in mutual funds, you can always start small. In many cases, you can invest as little as a hundred dollars just to get started. Look for funds that allow you to minimize loads and commissions, which are basically sales charges. A front-end load is a charge for buying a fund, while a back-end load, redemption fee or deferred sale is a charge for selling the fund. It’s also wise to find a fund that has a low expense ratio, which ideally should be 1% or less on an annual basis. This ratio represents the annual fees charged by the mutual fund, such as the administrative costs, management fees, and distribution fees. A mutual fund with a low turnover rate, ideally less than 50%, is preferred. It’s also a good idea to look for a fund that has produced good returns in the past, as well as one that is being handled by an experienced manager. If you’re not sure which mutual fund is right for you, consult a financial planner or investment advisor. Finally, always make sure you review your mutual fund on a regular basis, to make sure it is still on track to meet your financial goals.

What are Index Funds?

Index funds are an investment that strives to duplicate the index of a specific financial market. They are often chosen by investors because of their low portfolio turnover, low operating expenses, and broad market exposure. The portfolio of an index fund is designed to match that of a specific market index, such as the Standard & Poor’s 500 Index. These funds are often popular with investors because in many cases they outperform other kinds of mutual funds, even those which are actively managed. They are considered to be a form of passive investing. As such, the management expense ratio is often quite attractive for an index mutual fund.
Understanding Index Funds
Index funds are designed to get the same overall results as the stock market. They can eliminate the hassle of choosing individual stocks or more specialized funds. These funds are generally seen as a good investment, because overall the market has appreciated over the years, in spite of the natural peaks and valleys. In theory, since the overall market continues to rise, a fund that simulates this same growth pattern will also appreciate over time. Investing in an index fund can be a very simple method of investing. These funds match one of the various stock market indexes. Popular choices include the NASDAQ Composite Index, the Dow Jones Industrial Index, or the S&P 500. In order to match the overall growth of the index, each share of the fund consists of a proportional amount of stock from each company within the overall index. The proportions are determined by the index itself, instead of being managed. In many cases, an index fund will actually outperform a carefully managed mutual fund.
Factors to Consider about Index Funds
It’s important to understand that these are not completely foolproof. If the overall market is down, an index fund will also go down in a proportional fashion. Also, even though it is estimated that an index fund generally outperforms a managed fund about 80% of the time, that still leaves 20% of the time that it does not. If the stock market as a whole has a good year, investors in index funds will also have a good year. However, if the market is in a downturn, returns on an index stock will also be down. However, overall they are a good choice for those who are looking for steady growth and lower risk, especially as compared to other more volatile investments such as specialty funds. Overall, the risks associated with an index fund match those that exist in the stock market overall. On the down side, an index fund will provide less investment flexibility as compared to a non-index fund. Because of how they are set up, they do not have the ability to react to security price declines, because they are based upon set proportions. However, some investors actually consider this to be an advantage, especially over the long run. Overall, an index fund can be a good addition to an investment portfolio, especially when combined with other types of funds to provide diversity.

Tax deal says we're deadbeats

The world has a fair deal of experience in dealing with small countries that can't pay their bills. And the world is gaining more experience by the minute. Ireland can't pay its bills? (Or actually its banks' bills?) Put together a funding package at the price of domestic austerity and higher taxes. And when the small countries can't pay their bills again in a couple of years, go through the process over and then over again until creditors finally agree to take a haircut on their loans.
But what about a huge country, one that is at the center of the world's economic and financial system, one that can be described as the world's greatest power, one that controls the world's supply of money? What do you do with such a country, one that can pay its bills but shows no inclination to do so? And instead brazenly asks for more credit?

The world doesn't have a lot of experience working its way through problems like that. But I think that's the kind of problem that now confronts the world.  to extend the Bush administration's tax cuts for an additional two years at the cost of adding $1 trillion to U.S. debt says to the world that we have no intention of paying our bills.And it pugnaciously adds, "So what ya gonna do about it?"

Another deadbeat nation

I've actually been able to find just one example in Western history that sheds any light on the situation the United States and the world finds itself facing -- the multiple bankruptcies of Spain in the 16th and 17th centuries.In the 16th century, the Spanish Empire stretched farther across the globe than any previous empire. Starting from an Iberian peninsula unified under Castile and Aragon only in 1492, the Spanish empire grew to encompass first the island then known as Hispaniola, then Cuba, Mexico, the bulk of South America except for Brazil, and the islands of Guam and the Philippines. In Europe, Spanish monarchs ruled the Netherlands, Belgium, much of Italy and parts of Africa.
And it was a fabulously rich empire. The great silver mines of Peru and Mexico began to deliver a river of precious metal -- supplemented by gold from conquest and mining -- as early as 1511. Spain imported 260,000 kilograms of silver and 5,000 kilograms of gold from 1511 to 1550. And that was just the beginning. From 1591 through 1610, the country imported 4.9 million kilograms of silver and 31,000 kilograms of gold. The flood of gold and silver into Europe, a region previously starved for precious metals, was so great that the supply depressed the price for both metals and set prices for goods and services climbing.
But less than half of this silver and gold remained in Spanish hands. About a third went to China to pay for Spanish imports of silk, porcelain and other luxury goods. The remainder went to pay for Spanish imports from the rest of Europe. The Spanish economy itself was an increasingly uncompetitive hulk. Spain lived beyond its means, supported on that wave of New World silver and gold.
And that included the Spanish monarchy. Silver and gold poured in, but running an empire is expensive when it includes almost constant war in Europe with a constellation of national enemies that included France and England, plus local rebellions in the Netherlands and Italy, plus more than a century of land and sea battles against an Ottoman Empire that moved relentlessly westward after its capture of Constantinople in 1453.

Borrowed prosperity

The kings of Spain found it much easier to borrow money -- after all, what lender could afford to say no to the most powerful kingdom in Europe? -- than to reform the Spanish economy. But the seemingly inexhaustible flow of treasure from the Western hemisphere encouraged Spanish kings to think they could borrow and repay any sum -- and what bank would have had the courage to question the creditworthiness of the most powerful kingdom in Europe? The result was bankruptcy in 1557 that left the Fugger bank in Augsburg holding the bag.The circumstances of that 1557 bankruptcy may sound familiar. The bank made the classic mistake of mismatching assets and liabilities: The Fugger bankers took out long-term loans in Augsburg in order to make short-term loans to the Spanish king. Payments on the long-term loans were to come from payments on the short-term Spanish loans. Then, in 1557, Phillip II of Spain decided that he had more use for two payments intended for the Fuggers than they did. In effect, Spain declared bankruptcy, and the bank renegotiated its loans with reduced interest payments and a longer payment schedule.
The same thing happened again in 1575 when Spain again stopped paying on its loans, and in 1596. That last Spanish bankruptcy ended the Fugger bank and gave lucky Genoese bankers the opportunity to finance Spain.
In a desperate attempt to satisfy its creditors, Spain debased its currency, replacing silver and gold in its coins with copper in 1599. That led to runaway inflation in the first half of the 17th century. From 1625 to 1650, prices climbed by 40%.
By the second half of the century, the Spanish economy was in rapid decline as high taxes on peasant producers -- just about the only class that would pay significant taxes -- led to a decline of food and wool production, and high inflation made Spanish exports uncompetitive against imports from England, France and the Netherlands.
And by 1675 Spain, once the greatest empire in the world, was ready to be picked apart by the France of Louis XIV.

5 people who peek at your credit

How much do you know about your credit scores? Those three-digit numbers are tied to our financial lives, yet many young adults haven't given them the attention they deserve.
Your scores can play a role in your ability to rent an apartment, qualify for a loan or even get a job. They can also affect how much you'll pay on interest charges, insurance and even cell phone contracts.Make building stellar scores a priority while you're young and you could actually save hundreds or thousands of dollars over your lifetime. However, if you don't take your credit seriously, bad scores -- or even nonexistent scores -- will cost you.

Who's keeping score?

Your credit scores are basically used to predict the possibility that you won't pay your bills. Scores are compiled by Fair Isaac and are sometimes called FICO scores. The top possible number is 850, but topping 800 is probably unrealistic. A median score usually falls in the 720-to-725 range, meaning half of consumers fall above that point, half below. Even if you haven't given your FICO scores much thought, there are plenty of others who have or will, so you'll want to aim for the mid-700s to make the best impression on: 1. Lenders. This group is the one most people associate with their credit scores. Having a good rating can help you qualify for the best rates on a mortgage, car loan, credit card and even a small-business loan if you've got that entrepreneurial spirit. Nonexistent scores can make it impossible for you to qualify for a loan or credit card.
2. Insurers. The majority of auto insurance companies use your credit scores when determining your rates, and the practice is also common among home insurers. A survey by Consumer Reports among eight popular auto insurers found that drivers with top scores pay up to 31% less on their premiums than if credit scoring wasn't factored in, while those with bad scores pay as much as 143% more. 3. Landlords. Increasingly, you may need good credit scores to rent an apartment. Landlords view your credit rating as a measure of your responsibility to pay bills on time. If your rating is below par or you don't have credit scores yet, you may have to find a friend or relative to co-sign your lease, or you could be required to pay a higher rent or security deposit.
4. Employers. When you're applying for a job, potential employers can pull your credit reports as long as they notify you first. And, in fact, about 35% of them do, according to the Society for Human Resource Management. Why? Bad credit can be a signal of irresponsibility, or employers might be worried you'll spend more time fretting about your financial woes than concentrating on the job.
5. Cell phone carriers. Even cell phone service providers may check your credit before signing you up for a plan. They want to make sure you're responsible and will pay your bill each month. Some utility providers may pull your reports as well. If you have credit issues, you may not qualify for the best plan rates, you could be required to pay a deposit, or you could get turned down.

True cost of your scores

So, how much do your credit scores affect your finances? Say we have two friends, Jim and Mark. Both took steps right out of college to start building a credit report by getting their first credit cards and an auto loan. Jim made all his payments on time, never maxed out his credit cards and often paid more than the minimum required. Mark, however, frequently paid late, overextended his cards and applied for new credit to bail him out of his mismanaged debts.Now both are ready to buy homes, and each applies for a $250,000 30-year mortgage. Through Jim's responsibility, he's been able to build scores of 750, qualifying him for a loan with a 4.58% interest rate. Mark's scores come in around 650, netting him a rate at 5.40% interest. Jim's monthly mortgage payment is $1,279 while Mark pays $1,404 -- a difference of $125 per month. If they both live in their homes for 10 years before selling or refinancing, Mark will pay $15,000 more in monthly payments than his friend. Ouch.
Mark also gets burned on a new auto loan -- paying $2,340 more over three years on a $20,000 loan than Jim. Plus, Mark probably paid much more for his car insurance than Jim.

Your 15-point tax-return checklist

1. Get serious. Unless you're focused, you're going to see that receipt six times rather than the once you need. This is all mental now. Schedule a time to get to work and commit to that time. Then . . .
2. Get started. Remember that commitment to get to work? Keep it! This step requires action. Get your pencil and take the blank forms out of the envelope where you've been hiding them, praying that the tax fairies would make them go away. My father reminds me of the old Brooklyn proverb, "A trip of a thousand miles begins with a traffic jam." Get in that "jam," and your tax return will begin to jell. Now . . .
3. Get organized. Something has to go on those returns. Get your W-2s together to report wages, your 1099s to report interest and dividends, your 1099Bs for reporting stock and bond sales, and your 1098s for deducting your interest and taxes. The Internal Revenue Service and your accountant both want final numbers. It makes it easier for them and less painful financially for you. Bring either one a shopping bag full of receipts and you're going to feel the pain . . . especially in your wallet.

4. Get informed. Have you been following all the changes the U.S. tax code has seen in the past decade? How about the multiple new tax bills passed just this year? The adoption credit has been made refundable and extended. 2010 is the last year you can use your flexible spending money for nonprescription medications. Get them in while you can. Bush tax cut expiration anybody?Even better, have you looked at the new American Opportunity Tax Credit, which can give you as much as $2,500 in tax savings? If not, get educated! While you're getting enlightened, don't neglect the tax credits on energy-efficient improvements to your home. And if you're a new home-buyer (one who hasn't owned a principal residence for the last three years), you can get a refundable credit of 10% of the purchase price, up to $8,000, on a new principal residence. If you've been in your home for five of the last eight years, you can purchase a new principal residence and qualify for a 10% credit of up to $6,500. But to qualify for either home-buyer credit, you had to be under contract by April 30, 2010, and close by September 30, 2010.
If you're "tax simple," the IRS can actually do the return for you, or you can have your return done online -- sometimes even for free. Alternatively, if you're tax-savvy, do your own return after learning the new rules. A good place to start: the IRS' absolutely free Publication 17. It's hundreds of pages of everything you need to know about your 2010 tax return and your planning for 2011. If that's too much, go to a professional.
5. Get help. You might remove a splinter from your own finger, but you wouldn't perform heart surgery on yourself. A trip to a tax professional should at least tell you what you're missing. Don't hesitate to ask for help; it's deductible. But call for an appointment now! The later your accountant does your return, the more tired that tax preparer will be. You want your return done when she's at her best.
6. Get status. Decide how you're going to file. The lowest rates are with joint returns, but if there are potential high medical or miscellaneous deductions, married filing separate may yield a lower total tax. Do it both ways. Alternatively, a single mother may qualify for the head-of-household rates, which are better than the rates for filing as a single. Sometimes, when a joint return isn't practical, even a married person with a dependent child can qualify for head-of-household rates, which are much better than married filing separate. You need to know the rules.
7. Get adjusted. There are certain deductions that are allowed regardless of whether you itemize. Such deductions include IRA and qualified pension contributions, student loan interest, moving expenses, alimony, medical savings account deductions and, for the self-employed, the health insurance deduction and deduction for half the self-employment taxes paid. These are known as "above the line" deductions. The infamous "line" is your adjusted gross income -- line 37 on Form 1040.
8. Get itemized. Which is bigger -- your standard deduction or the sum of your itemized deductions? We're now "below the line." The chart to the left of line 40a on your 1040 form for 2010 lists your standard deduction. Compare this amount to your total allowable itemized deductions. That's the sum of your allowed medical expenses, taxes, interest, charitable contributions, casualty and theft losses, and miscellaneous itemized expenses. Always do it both ways . . . and, subject to the alternative minimum tax (and don't even try to get into that), always take the higher amount.