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Mutual Funds Special

If you are young and do not make much money but want to start investing, mutual funds are the best place to start. The problem is, there are so many mutual funds out there. On this Special Edition of The Suze Orman Show, Suze teams up with Christine Benz, Associate Director of Fund Analysis with Morningstar, Inc. CNBC contributor and author of the Morningstar Guide to Mutual Funds: Five-Star Strategies for Success to discuss everything viewers should know about mutual funds.

WHAT IS A MUTUAL FUND?

• Christine Benz describes mutual funds as a basket of investments.
• They typically invest in stocks or bonds or a combination of the two, but they can invest in almost anything.
• They provide diversification in a single shot. You can buy a number of different stocks with a low minimum purchase.
• They are the most common investment in 401(k) plans, so it is important to understand how they work.

WHAT IS THE DIFFERENCE BETWEEN A SHARES, B SHARES AND C SHARES?

• With an A Share fund, you pay a sales charge when you buy into the fund. It is usually around 4% and often called a load. The 4% goes to the broker and investment house upfront.
• With B Shares, you won’t typically pay a sales charge up front but you will pay one when you sell if you haven’t held the fund for a long enough time. B Shares have higher ongoing expenses than A Shares. You pay more as you go along.
• C Shares do not carry a back or front end load but the trade off is you are paying much higher expenses year in and year out to own that mutual fund.

SUZE SAYS:

Every mutual fund has a portfolio manager who decides what stocks and bonds to buy or sell. This is the person who makes money for shareholders. The person who sells you the fund, however, is trying to make money for themselves and the investment house. You will be paying them the expense ratio. This is the amount of money you are going to pay out of your return for the fund to run itself. Avoid paying a high percentage of your return, avoid A Share, B Share and C Share funds, and seek out NO LOAD funds.

WHAT ABOUT BUYING STOCKS ONLINE?

Suze says you should pay less of a commission if you buy stocks and bonds on the Internet, since there is no middleman. Check out sharebuilder.com and siebertnet.com, which can save you lots of money trading online.

MY COMPANY DOESN’T OFFER A 401(k). WHAT IS A GOOD MUTUAL FUND TO INVEST IN FOR MY RETIREMENT?

Christine Benz suggests looking at mutual funds that offer automatic investment programs. This means an individual would make an investment every month and the investment can be as little as $100. Check out the T. Rowe Price group of mutual funds. You can buy in with a minimum of $100 if you agree to put in $100 a month. For specific core stock funds look at T. Rowe Price Equity Income and T. Rowe Price Spectrum Growth. These are good diversified, stand alone funds.

WHAT IF I’M ALREADY IN A LOAD MUTUAL FUND?

Christine Benz says if you are already in a load fund, don’t pull your money out right away. The damage has sometimes already been done. There are some good load funds out there like American Funds with low ongoing expenses and some funds from Pimco (Christine Benz owns shares of Pimco High-Yield), which are low expense funds and great in terms of bonds.

SUZE SAYS:

If you have a B Share fund you are going to pay a surrender charge if you pull out before a certain number of years. Call your financial advisor and ask what percentage you will be charged if you pull out now. It could be a hefty amount. With that information you can look at the annual return of that fund and more importantly, the expense ratio of the fund. The expense ratio is the most important factor in determining the future performance of that mutual fund. If your surrender charge isn’t high but your expense ratio is (over 1%), it is OK to get out of the B Share fund. If not, stay in, but put new money in a no load mutual fund.

WHAT ABOUT TARGET RETIREMENT FUNDS?

Christine Benz says both Vanguard and Fidelity offer decent funds but they vary dramatically in terms of their asset allocations. Vanguard funds are very conservative. They may be too conservative. Fidelity funds are a little more stock heavy. Another good stock heavy fund is T. Rowe Price Retirement Series Target Maturity Fund.

IS THERE A GOOD POINT TO SELL MUTUAL FUNDS TO RESET THE TAX VALUE BASE?

Christine Benz says if you are planning to buy a mutual fund that’s about to make a big distribution, then you should wait. By the same token, if you are going to sell a fund anyway, better to wait before the distribution because that distribution can cut into your return. For the most part, don’t get too fancy with tax maneuvering of your mutual fund.

SUZE SAYS:

Mutual funds are mandated so that at the end of the year gains must be distributed to a shareholder. If an individual owns shares of a mutual fund and it has a capital gain distribution, you will get a check for a certain amount of money on which you will owe taxes. So if you happen to buy a mutual fund that is about to distribute that gain, you could have an immediate loss when you buy. For this reason, Suze says that when you buy a mutual fund is more important than when you sell a mutual fund.

TO MINIMIZE YOUR TAX BURDEN, CHRISTINE BENZ SAYS:

Avoid buying a fund at the end of the year. Wait until the beginning of the following year. You will avoid the distribution for gains you didn’t receive.

THE REAL ESTATE MARKET HAS BEEN GREAT. SHOULD I BE PUTTING A LOT OF MONEY INTO REAL ESTATE INVESTMENT TRUSTS?

Christine Benz says she would be nervous about putting a lot of money in real estate investment trusts (REITS) right now given how good the market has been. Typically good performance does not beget good performance. There may be a cooling off period with real estate.

SUZE SCHOOL: WHY YOU SHOULD BE HAPPY THAT YOUR MUTUAL FUNDS ARE GOING DOWN!

If you own shares in a good mutual fund, you don’t want that fund to be going up. If your fund is going down, you should put in more money and buy more shares. The more money you add and more shares you have, the better off you will be for retirement. Don’t be depressed if the shares go down, because you are going to make more money in the long run!

Christine Benz says the best lever you have in improving your investment return is your savings rate. So if you can possibly sock away a little more each month, you will be that much better off in the end.

2015 Suze Orman Media, Inc. All rights reserved.