Unless you’re nearing retirement, the biggest chunk of your investment portfolio will probably be comprised of stock mutual funds. So in this section of the guide, I’m going to walk through how to invest in stock or equity funds. After completing this section, you should to able to move forward with confidence in the mutual fund choices you make for your portfolio.
However, before you dive into the details of buying into stock funds, you should confirm a couple of things. First, you should ensure that the economic environment favors stocks, as opposed to bonds or money market instruments. I covered how to recognize where you should invest your money in this section of the guide.
Second, you should determine your risk tolerance level and objectives, and design your investment portfolio at a high level. If you haven’t done this already, check out this article…
So if you’re all set, let’s talk stock funds. I logged into my online brokerage account and randomly selected a stock mutual fund. In no way am I recommending that you invest in this mutual fund. This is for demonstration purposes only.
I’m only going to cover the most important elements that you need to check when evaluating mutual funds.
Fidelity Stock Mutual Fund – Overview & Summary
As you can see in the first image below, I chose the Fidelity Growth Strategies Fund. Just below the title of the fund, you can see the words “Mid-Cap Growth. So this fund’s investment objective is to seek out “growth” companies that have a market value between $2 billion to $10 billion.
Also in the title area, you’ll notice where is says “NL No Load”. This is great. It means that the fund doesn’t charge an extra sales commission to invest in it. You should seek no-load funds.
Next, the net asset value of this fund is $27.91. Net Asset Value (NAV) is just the mutual fund version of price per share. It’s what you’ll have to pay to buy in. For example, if you invest $2,000, that’ll get you 71.659 shares ($2,000 divided by $27.91).
The NAV is a simple calculation. You would just take total net assets for the fund and divide it by the total number of outstanding shares. In this case, net assets are $2 billion and the total number of outstanding shares is 7,165,903.62.
Also, as you can see in the image header area, if you had invested money in this fund at the beginning of the year, the year-to-date return (YTD Return) on your investment would be 29.76%. That sounds pretty good, but lets keep digging.
The chart or graph shows how the mutual fund has performed since 2009. See the squiggly lines rising from left to right? I like the consistently upward trend. The “green” line represents the growth of the fund and the “orange” line represents the growth of the S&P 500.
The S&P 500 is comprised of the stocks of 500 leading companies. It’s a standard no-brainer computerized index that mutual funds and other investment vehicles use to determine how well they are performing against the stock market, in general.
Studies have shown that only about 25% of mutual funds beat the S&P 500. So this one is doing a little better than most.
Another key element on this chart is the “Gross Expense Ratio”. It’s the cost associated with operating the mutual fund. The average percentage for most stock funds is 1% to 1.5%. This one is lower than the average, which is a plus.
Fidelity Stock Mutual Fund – Return on Investment History
For any mutual fund, you should evaluate it’s performance over time and compare their record to other mutual funds. Below is a chart that shows the annual returns on investment since 2009 for our above Fidelity mutual fund example.
The first row “FAGKX Market Return” reflects the profit percentage you would have made on this investment for each indicated year. These percentages are then compared to two other metrics — “+/- Mid-Cap Growth” and “+/- S&P 500 TR USD”.
The “+/- Mid-Cap Growth” is basically telling you how the mutual fund stacks up against the overall category of mid-cap growth funds. For example, in 2013, our Fidelity example mutual fund earned 1.54% more than the group as a whole. In 2012, it under-performed the group by 2.04%.
Next the “+/- S&P 500 TR USD” reflects how our example fund faired against the average combined results of 500 leading companies. In 2013, the fund beat the S&P 500 by 4.46% and in 2013 it lagged behind the S&P 500 by 3.97%.
Finally, the “Rank in Category” indicates where this fund stands when compared against it’s competitors in terms of return on investment. For 2013, there are 29 more funds that delivered better results. Of course, what’s interesting about this fund is that it’s moving upward. Look how far down the list it ranked in prior years.
Fidelity Stock Mutual Fund – Investment Sectors
Now let’s examine where this mutual fund is investing the money investors provide. In the image below, it looks like this mutual fund invests in a wide variety of companies from several sectors. Cyclical stocks are those that rise and fall in unison with the overall economy. For example, when the economy falls people buy fewer cars.
Defensive stocks are those that stay pretty steady regardless of what’s happening in the overall economy. For example, people use about the same amount of natural gas, heating oil, and electricity whether the economy is booming or in recession.
Sensitive stocks fall between Cyclical and Defensive stocks. They will move with the economy, but not nearly as much as Cyclical stocks. For example, people and companies probably won’t cut back significantly in using Google and its services if the economy has a hiccup.
There’s a lot more information about the investments that is available but I didn’t include, such as the names of specific companies. But your objective is to examine the fund’s holdings and determine if they represent the type of companies and industries that you trust and believe in. For example, if you’re environmentally conscious, you might reject this fund because of some of its anti-environment holdings.
Fidelity Stock Mutual Fund – Morningstar Wrap-Up
Up to this point, we’ve learned quite a bit about this mutual fund. But there’s an independent organization that can tell us even more. Morningstar is a well-known company that evaluates mutual funds and other instruments. The image below is a snapshot of their assessment of this mutual fund.
The Morningstar Style Box confirms that this mutual fund is comprised of medium sized, growth companies.
The “Risk” level assigned to the fund is “Above Average”, but that’ll be the case with most stock related investments. The investment “Return” is deemed to be about “Average”.
When it’s all said and done, Morningstar gives this mutual fund and overall rating of 2 stars out of 5. I like the above average return ranking, but before I invested in this fund I would definitely take a look at the higher rated competition.
I hope this walk through helped you to understand how to invest in stock funds. There are multiple factors that you have to consider.
Specifically, you have to examine the fees charged, size of the fund, type of investments, rate of return, risk, competitor performance, and independent assessments. Follow this approach and you’re almost guaranteed to find more long term winners than losers.
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