Mutual funds?

Question

My wife and I want to begin to save for a home, and we realize it will take us a couple of years before we are ready to buy a home. While saving our money we are thinking that investing it in some mutual funds might help us reach our goal quicker, so my question is what style of mutual funds should we invest in? Growth, conservative, moderate, ect?

Answer 1

The choice of how aggressive or conservative your investment is really determined by your own ability to accept risk and still sleep at night. As many people are learning these last few weeks, losing money can induce stress if you are the fearful type.

To research mutual funds I recommend you try www.morningstar.com and not only look at the fund stats but read some of their articles introducing you to investment. A few hours of reading will benefit you greatly.

Since you probably can't resist jumping right in and looking at funds don't look simply at the historic returns. Also keep an eye on the "expense ratio" as this will tell you how much owning the fund will cost you.

Answer 2

You need to read a couple of good books on Investing or Mutual Fund Investing.

It's nuts to consider a Stock Mutual Fund for a home DP even if it's 5 years away.

The three major enemies of stock investors are;
Indecision
Fear
Greed

Yes... it sounds great to get 10% or more but the reality is you could average 10% each year and in the last year lose 35%. This is not a way to start your investing life. You'll lose big time and be afraid to buy anything thereafter.

Check out;
www.GMACBank.com
www.INGDirect.com
www.HSBCDirect.com

Answer 3

Finding the Best Mutual Funds

As the prices of mutual funds change daily, finding the best performing funds can be quite tricky. In case of normal stocks and securities, you often track the prices. But for the mutual funds, it is better to conduct research to decide which investment company is administering the fund and the specific securities held by the mutual fund.

Selecting a mutual fund administered by an investment company with good record of selecting attractive investments is a right sign that buying the fund is a smart move and securities held by the fund have been steady performers that can increase stability and security of a risky investment.
http://debts-to-wealth.com/category/Guide-to-Mutual-Funds.html

Answer 4

My personal opinion is to stick to bond funds if your time horizon is 7 years or less. Stocks are designed to be held for about 10 years or longer. If the market takes a downturn right before you need to tap your money for a down payment, then you are screwed. It is better to err on the conservative side for funding a home. Let your money grow in the equity of the home after you buy it, but don't try to grow the downpayment money in the stock market. (However, this is merely my opinion.)

If you do go the route of bond or money market funds, then consider the effects of costs. Bonds and money market instruments are pretty much a commodity. There is no significant difference in the payments from one source or another, especially with "investment grade" bonds. The bond market is very competitive and fund managers cannot eek out an additional yield by finding "hidden gems". There are no hidden gems. Basically, interest rates determine the bond yields and there is no "skill" in finding "super-bonds". So, the returns to an investor in a bond fund are almost completely dependent on interest rates (which he cannot control) and the costs of the fund (which he can control).

Therefore, I recommend picking an investment firm with the lowest possible costs for bond funds. There is clearly one champion in that area, http://www.vanguard.com . In fact, they just released a report showing that Vanguard's bond and money market funds beat all other competitors over the last 10 years, because of their extremely low costs.

Here is how to pick a bond fund:

- Pick only "investment-grade" bond funds. These will be ones that invest in bonds with a BBB or higher credit rating. You can see what bonds the fund invests in when you look up the fund. Investment grade bonds are from companies or governments with a good credit history. By using investment-grade bonds, you can avoid this whole "sub-prime" debacle that is going on right now.

(Oh, and don't worry about what direction interest rates are going. If interest rates rise rise, yes current bond prices fall. However, this means that new money sent into a fund with be used to purchase new bonds with higher coupons. This compensates for the drop in bond prices.)

- Pick a fund with "average duration" about the same as your time horizon. For example, if you plan to purchase the house in 2 years, pick a short-term bond fund with duration of about 1 - 3 years. If your time horizon is 5 years, then choose a bond fund with average duration about 4 - 6 years. The shorter the duration, the less it will fluctuate in response to interest rate changes.

Just keep in mind that you pay taxes on the interest and capital gains. However, if you are in a high tax bracket, you can purchase tax-exempt bond funds which pay less interest but are free from federal income taxes. (However, you still pay any capital gains taxes on tax-exempt bond funds.)

Or, if you do not want to deal with capital gains taxes, just stick the money in 6 month bank CDs and renew them as they mature. You'll get a slightly lower return than a bond fund, but this is simpler.

Answer 5

Warning!!!! mutual funds that don't succeed will siphon off your hard earned dollars. There was a guy who just posted today on how he lost $80,000 investing in Pacific Rim mutual funds just before the Asian stock market crash. Mutual funds are good when they are going up but are as risky as playing the stock market. If you are going to invest , invest in something with a safety guarantee like Guaranteed income certificates. That way your nest egg is protected , the interest is lower but much safer.

Answer 6

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