Mutual Fund Basics

Once you've decided to invest in the stock market, mutual funds are an easy way to own stocks without worrying about choosing individual stocks. As an added bonus, you can find plenty of information on the Internet to help you learn about, study, select, and purchase them.
But what is a mutual fund? It's not complicated. A dictionary definition of a mutual fund might go something like this: a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors.

The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. When you purchase shares, the fund manager invests your funds, along with the money contributed by the other shareholders.

Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by shareholders, and then calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day. If you want to buy shares, you just send the manager your money, and they will issue new shares for you at the most recent price. This routine is repeated every day on a never-ending basis, which is why mutual funds are sometimes known as "open-end funds."

If the fund manager is doing a good job, the NAV of the fund will usually get bigger -- your shares will be worth more.

Advantages of Mutual Funds

Mutual funds have become popular because they offer 4 advantages:
Diversification. A single mutual fund can hold securities from hundreds or even thousands of issuers, far more than most investors could afford on their own. This diversification sharply reduces the risk of a serious loss due to problems in a particular company or industry.

Professional management. Few investors have the time or expertise to manage their personal investments every day, to efficiently reinvest interest or dividend income, or to investigate the thousands of securities available in the financial markets. They prefer to rely on a mutual fund's investment adviser. With access to extensive research, market information, and skilled securities traders, the adviser decides which securities to buy and sell for the fund.

Liquidity. Shares in a mutual fund can be bought and sold any business day, so investors have easy access to their money. While many individual securities can also be bought and sold readily, others aren't widely traded. In those situations, it could take several days or even longer to build or sell a position.

Convenience. Mutual funds offer services that make investing easier. Fund shares can be bought or sold by mail, telephone, or the Internet, so you can easily move your money from one fund to another as your financial needs change. You can even schedule automatic investments into a fund from your bank account, or you can arrange automatic transfers from a fund to your bank account to meet expenses. Most major fund companies offer extensive recordkeeping services to help you track your transactions, complete your tax returns, and follow your funds' performance.

Liquidity with Mutual Funds

The third principle of mutual fund investing is liquidity. Mutual fund shares may be acquired or liquidated at a moment's notice at the fund's next determined net asset value per share. What is more, there is no direct cost of market impact, wherein buying securities tends to drive prices higher and selling securities tends to push prices lower. Nor is there a charge when shares are liquidated (although in some cases a 1% redemption fee is charged and in other cases a contingent deferred sales load may be assessed).
Owning securities individually, of course, is also apt to provide a reasonable level of liquidity. However, mutual funds can easily be converted into cash at a fraction of the cost you would incur in selling individual stocks or bonds. More, the ability to switch easily among different investment options provides remarkable flexibility in building a diversified portfolio, especially considering the costs involved in exchanging individual securities.

Questions to ask before you buy a stock

How many widgets are they selling?

Companies make their bucks by selling stuff, and lots of it. Most publicly traded corporations rack up sales running into the hundreds of millions of dollars annually.

When you buy companies without significant sales, you are buying the "story," not the company's fundamentals. Some will succeed, but it's risky business.

Based on my own experience, risk-averse investors will avoid lots of heartaches by sticking with companies racking up at least $1 billion in annual sales. Does that limit the field too much? Not really. When I checked, more than 1,400 stocks fit the bill.

If you are more adventurous, you will want to go lower, of course. But the risk meter goes off the chart when you get much below $100 million in 12-month sales. At the very least, go no lower than $10 million in sales in the most-recent quarter.

Is cash flowing in or out?

Cash flow measures the amount of money that moved into, or out of, a company's bank accounts during the reporting period.

Cash flow is a better profit measure than earnings because it's harder to finagle bank balances than numbers like depreciation schedules that figure into earnings. In fact, many companies that report positive earnings are actually losing money when you count the cash.

There are different cash-flow definitions, but operating cash flow, which measures the cash flow attributable to the company's main business, is a good place to start. Find it on the quarterly cash-flow statement by selecting Statements under Financial Results, at the left of the quote page, and then selecting Cash Flow and Quarterly from the dropdown menus.

3 ways to save on homeowners insurance

You can save money on homeowners insurance if you know how. Discounts from your insurance company are available for a variety of reasons, ranging from the type of building material used to build your home to how close you live to a fire station. Here are 3 ways you can save money on your homeowners policy:

Consider insurance consequences when buying a home. If you're looking at buying a home, think about the cost of insuring the home. A newer home's electrical, heating and plumbing systems, and overall structure are likely to be in better condition than those of an older home. This can lead to a discount on your premiums.

Also consider the construction of the home and your geographical location. If you live on the East Coast, you'll want the house to be able to stand up to wind damage; on the West Coast, you need to keep earthquakes in mind.

Insure your home, not the land. Although your home and its contents are at risk from fire, theft, windstorms and other perils, the land your house sits on is not. Don't include the value of the land in deciding how much homeowners insurance you need to buy.

Improve security and safety. Items such as deadbolt locks, burglar alarms and smoke detectors often bring discounts of 5% each, depending on the company. Your insurance company may also offer a significant discount of 15% or 20% if you install a sophisticated home-security system. If you're thinking about buying such a system, check with your insurer to see which systems they recommend and which will earn you a discount.

Refinance your life insurance

If you've got a term life insurance policy, chances are good that you're paying too much for it.

Rates on term policies have been tumbling for more than a decade and are, according to a survey by Insure.com, hitting all-time lows. (Term policies are "pure" insurance that offer a death benefit but no investment component, as opposed to "cash value" or "permanent" insurance that combines a death benefit with an investment feature.)

Millions of Americans used lower interest rates to refinance their mortgages, sometimes repeatedly, and many even refinanced their cars. But many people are failing to take advantage of a similar opportunity to get cheaper life insurance.

Better premiums are out there You might be missing out on a good deal if you:

• Bought your policy years ago. People assume that because they're older, insurance will cost more. In reality, competition and lower mortality rates have driven premiums down to the point where you can pay less for a policy at age 50 than you did 10 years ago when you were 40.

• Buy your coverage through your employer. This may be a convenient way to buy insurance, but it's an expensive way to go if you're younger and healthier than the average employee. The insurer prices the policies to cover the higher-risk folks, so you're essentially subsidizing the older, sicker workers.

• Don't qualify for "preferred" rates at your insurer . . . and don't realize that you may very well qualify for lower premiums at another company.