Mutual Funds 101

This article is by our guest writer Sandra Hajda, a freelance journalist, publisher and avid investor. Sandra resides in Melbourne and can be contacted at hajdasandra@hotmail.com.
It’s increasingly recognised that shrewd investment is essential to achieving a high standard of living, especially after retirement. The web is awash with stories of middle income-earners (teachers, laborers and IT professionals) who have created extraordinary wealth by studying the markets.
The average investor can expect to live more comfortably (not everyone will rake it in like Rene Rivkin!). But financial terminology is prohibitive, to say the least: a minefield of jargon, abbreviations and subtle distinctions that may take years to master. Here’s our helpful introduction.
Bond Investing
A debt instrument. When you buy a bond you become a creditor- the idea is that someone uses your money to raise capital (for their business, say). The bond is a promise that you will be repaid with interest by a specific date (maturity). Popular index: Merrill Lynch Domestic Master.
High Yields
Feeling brave? Looking for high risks with high potential returns? Then you want high-yield bonds. High-yield is basically a rating: it means a bond is regarded as ‘risky’, with high probability of default (the bond equivalent of bankruptcy- you get zilch!). If there’s no default, the payout will be oh-so-sweet.
Money Market
The market for borrowers and lenders whose transactions are settled within thirteen months: your short terms investments. If you’ve ever invested in a Money Fund (particularly Repurchase Agreements), handled a Certificate of Deposit, or made a deposit in US dollars outside the United States, you’ve participated in the Money Market.
Investors
Anyone-or anything- that makes an investment; individuals make up only a tiny percentage of active investors. Venture Capital Funds, Investment Banks, businesses, Investment Trusts, Hedge Funds and Mutual Funds are all investors, and most are prepared to invest on your behalf.
Equity Funds
These funds invest in equities, better known as stocks. The goal is long-term growth. The Money Market can offer immediate liquidity, Government Bonds offer safety, and regular Bonds give maximum income, but Stock Funds give the highest probability of a big payout. If you’re willing to wait.
Market Timing
Market Timing is the strategy used to buy or sell; it allows you to profit or lose. Many sophisticated theories (such as Time Zone Arbitrage) have tried to predict the market, but most analysts regard investment simply as a form of gambling.
Investing for Beginners
First choose a good broker. Ask yourself: do I want someone selecting my investments? If so, use a Full Service Broker (eg. Morgan Stanley). They’ll set you up with a package of bonds and stocks. Feeling independent? Sign with a Discount Broker, watch the indices yourself and make the decisions.
Hedge Funds
A hedge fund attempts to offset losses by ‘hedging’ its investments; Short Selling is the major strategy used. The hedger sells an asset he doesn’t then own, hoping to purchase it later once the price has decreased. By ‘shorting’ hedgers can profit from price decreases as well as price rises!
Emerging Market
The markets of developing countries, including China, India, South Asia, Mexico, Latin America and some of Eastern Europe. Political events play a bigger role in influencing the markets in these countries; theoretically you could profit by reading the papers and selling assets quickly when you smell political upheaval.
Investing in Gold
Can be done by purchasing shares and derivatives or by literally owning bullion! The gold price is influenced by changes in sentiment, gold hoarding and the activities of the International Monetary Fund. Thought to preserve wealth in the face of inflation, but won’t offer the long-term returns that stocks do.
Now that you’ve done the groundwork those rambling financial articles won’t seem so daunting. Happy investing!