You are invested in Individual Retirement Account (IRA) certificates of deposits and bonds for your retirement. These are excellent investments; but you do not want all of your IRA investments in these type of savings because you can get locked in with low annual percentage yields. It was just a few years ago that you were fortunate to get a certificate of deposit with 2.75% yield.
You are looking for another type of retirement investment that provides a higher annual return and you want to exercise caution. Your goal is to maintain a comfortable life style whether the market goes up or the market goes down.
A excellent IRA investment option is a Mutual Fund — the common name for an open-end investment company. Like other types of investment companies, mutual funds pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds issue redeemable shares that investors purchase directly from the fund or through a broker for the fund. As an IRA investment in your portfolio, you want a mutual fund to meet certain conditions such as:
1) Return over long-term (5 years) should be above the average certificate of deposit yields. An example would be a mutual fund that provided 35% or 7% average for 2002 through 2006. There is no guarantee of past performance but it can help you assess the fund’s volatility.
2) Risk has to be minimal. The risk ratings of mutual funds ranges are low, below- average, average, above-average, or high. Risk is a standard deviation of the return on total investment.
3) Distribution the mutual fund gives its shareholders income and/or capital gains. All distribution should be reinvested and thereby increasing the number of shares owned. Taking this action enables you not to be taxed for the income or capital gains received. You acquire shares of the mutual fund at a lower net asset value price (the share price is reduced by the amount of distribution).
4) Total Expense ratio should be low or should not exceed the average of other mutual funds serving the investment classification. The total expense ratio is the fund’s total annual operating expenses which includes management fees, distribution (12b-1) fees, and other expenses is expressed as a percentage of average net assets.
On September 15, 2006, Mutual Interest Data Service created a mutual funds model and hypothetically invested $10,000 four mutual funds.
The objective for the investment was: 1) achieve performance growth, 2) increase the shares owned, 3) minimize the risk, and 4) maintain a comfortable lifestyle in all market conditions whether the markets up or the markets down.
o $2,000.00 (114.92 shares) Balanced
o $2,500.00 (89.22 shares) Equity Income
o $2,500.00 (139.60 shares) Multi-Cap Core
o $3,000.00 (20.19shares) Specialty Health
o $9,843.08 (-1.56%)total portfolio investment purchased after initial fees.
As of March 30, 2007, the total accumulated (distribution of income and capital gains and performance) return on these funds is $10,657.67 +6.58%. If distribution was not received and reinvested, the total return would be $10,144.85 +1.44%.
Mutual funds are not guaranteed or insured by the FDIC or any other government agency — even if you buy through a bank and the fund carries the bank’s name. There is no guarantee for past performance. Always contact the mutual fund and read the prospectus before making any investment.