Deciding where to invest your hard earned money can be a challenge. With so many options available it can be tough to decide what type of investment account(s) is right for you. One option you will highly want to consider is a mutual fund. Mutual funds are a great way to invest your money into a diverse portfolio. Here is a look at what a mutual fund is, how they work and what the advantages of investing in one are.

What Is A Mutual Fund

When you invest into a mutual fund you are investing your money into an account where money managers of the account combine your cash with thousands of other small investor’s in order to create a diversified portfolio. When you invest your money into the mutual fund you receive a certain number of shares of the fund you have contributed to. The fund manager is then responsible for taking the pooled money that has been deposited into fund and invests it in a variety of stocks and bonds. You then will receive a cut of the return based on the percentage of shares that you own.

There are numerous advantages of investing into a mutual fund including the following:

• Investing into mutual funds does not require a large upfront investment. For as little as about $1000.00, or even less in some cases, you can get started at investing into a mutual fund.
• Mutual funds offer buyers a diversified portfolio.
• Mutual funds offer the convenience of being able to easily invest your money without a lot of work on your part. It is much more complicated to invest you money individually into stocks and bonds.
• Mutual funds are easy to manage in that you as an investor do not need to take the time to research every stock and bond that your money is going into. Professional account managers who are educated and skilled carefully select where funds will be invested.
• Mutual funds are easy to buy. You can easily purchase mutual funds through a broker or on your own.
• Mutual funds are easier to liquidate than other investment options. Most mutual funds offer a daily payout option. In other words, when you are ready to cash in your fund you can do so without having to worry about finding a buyer like you would if you owned individual stocks, for example.

There are some disadvantages that you will want to consider as well:

• You do not have control of exactly where your money is going. If you are someone who always has to be in control a mutual fund may not be a good option for you. Your return is based on the mutual fund manager’s choices and not your own.
• The cost of owning a mutual fund can also be higher than other investment options. Sales commissions can be high and you will want to be aware of what fees you will be paying before you invest.
• Just like every other investment that you make, there are no guarantees that you will actually see a positive return.

photo credit: Poppy Wright

Rising fuel prices make investing in oil and gas more popular then ever before. But finding the best oil and gas mutual funds can be tricky business. Playing in energy requires knowing what you are getting involved with and a strong ability to monitor the market and know how and when to take action. If you have strong knowledge of the market and the ability to monitor your shares, then investing in oil and gas mutual funds can be a fantastic way to diversify your portfolio of investments.

Choosing how to Invest

Deciding whether to use your personal financial adviser or going it alone through an online trading account can be a tough decision. Getting the personal recommendations and advice of a trusted financial adviser can be costly but beneficial. If you’ve already been working with a financial adviser, then they know your financial situation and understand your portfolio and can help you make the best investment decisions.

Using an online trading account can be a little more cost effective, but you don’t get personal attention. However you can take your time searching through the options. You will be able to access several types of mutual funds and see which ones are performing well and which ones might fit your portfolio. You’ll be able to research and make decisions on your own time.

Which ever method you choose there are commonalities in how you should proceed. You should look for no load mutual funds so that you avoid lots of extra fees. The commissions and management fees that each brokerage firm charges is different, and paying attention to the funds that have the lowest associated fees is important. You want your investment to yield you a high return, not pad someone else’s wallet.

Choosing Oil and Gas Funds

When choosing a fund, look for one that has a good 10 year, 5 year and 1 year gain. While the one year outlook might not be so good, it can be an indicator of where prices and profit are right now.

The price of oil hinges on multiple factors and can make investing in an oil and gas mutual fund risky. However, with the right investments and right moves it can be one of the most lucrative investments in your portfolio.

Pay attention to the economy. Whenever the price of oil drops, it’s a good time to consider purchasing at least the $100 minimum. Keep an eye on the political climate in the Middle East and North Africa which tends to affect oil prices most dramatically. If you see prices sink, grab up as many shares as you can reasonably afford. We all know that oil prices will rise at some point and will make your investment profitable.

One Oil Mutual Fund Example

ProFunds UltraSector Oil & Gas Investor Fund (ENPIX) is one way to get into the oil and gas sectors.  Year to date the fund has returned 19.2% and that’s following a 25% return in 2010.  Not to shabby.

Remember though that dealing in energy is very risky, so never invest more then you can afford to lose. Be sure that mortgage and rainy day funds are secure before you start dabbling in the energy market.

photo credit: EstuarineDesign

If you have received paperwork regarding a class action mutual fund settlement, the first thing you need to understand is that the documentation is not a scam. The class action lawsuit stems from the 2003 mutual fund scandal were mutual funds were involved in market-timing and late trading practices that are illegal. In 2003, New York’s Attorney General Eliot Spitzer began an investigation after receiving a tip from a Wall Street working that late trading was becoming a problem.

photo credit: Let Ideas Compete

Late trading occurs when traders are permitted to purchase fund shares after the 4:00 pm EST set time for mutual fund prices. Market timing is an investment strategy where an investor tries to profit from short-term market cycles. Trades are done as market sectors heat up or cool down. Firms involved in the suit are alleged to have committed fraud when some clients were allowed to trade more frequently than was permitted by their fund documentation.

Mutual Fund Involvement

You’ll need to recall which, if any, of the mutual funds you had an involvement with as far back as October 1998. The following list of mutual funds are involved in the class action lawsuit:

• Alger
• AllianceBernstein
• Allianz
• Bank of America/Nations
• Columbia
• Federated
• Deutschebank/Scudder
• Invesco
• Janus
• MFS
• One Group/Bank One
• Pilgrim Baxter (PBHG)
• Putnam
• RS
• Schwab/Excelsior
• Strong

How to Claim Your Mutual Fund Settlement Monies

If you have an involvement in the class action lawsuit over mutual funds, you will need to submit a claim. Here is what you need to know about claim submittal:

• Settlement Period – the time for each fund varies but most go back to October 1, 1998 to September 30, 2003.
• Deadline – claimants have until December 8, 2010 to submit a claim.
• Claim Process – most claimants will receive a notice via mail. The notice will direct you to a website where you will file your claim using a dedicated number.

Individuals who have a claim but have not received a claim notice in the mail can still submit a form through the website. Claimants will need to identify how many shares of each mutual fund were held at the end of each of the years included in the lawsuit.

You will need to do your homework regarding the dates of your involvement with any of the included mutual funds. It may be advisable to create a spreadsheet that lists dates and funds in order to account for all potential claims.

A court-approved website will direct you to more specific court-approved sites that explain the proposed settlements reached in the above-listed mutual fund families in the Mutual Funds Investment Litigation.

With 2008 approaching it’s end, we are heading towards one of the worst market drops in it’s recent history.  Retirement accounts have lost trillions of dollars with no potential of tax loss benefits.  But, what about taxable accounts?  Surely, this is a year that capital losses can be taken?  While this is usually the case with most stock investments, but most investors and boomers have to be careful about are mutual funds in taxable accounts.

Paying Taxes In A Down Market

As absurd as that sounds, this is a reality in down years of the market.  Nobody likes to pay taxes, especially in a down years.  Nothing like the IRS kicking you while you are down.  Ouch!  But why does this happen?  Here are a few reasons:

Selling Off

If the money managers are expecting a downturn in the market, they may go ahead and sell off some of their long term holdings to lock in gains.  While it’s always good to lock in gains, those gains are then passed on to the you the shareholder.  Merry Christmas!

Liquidate, Liquidate, Liquidate

When the markets heads south, people panic, and they want to sell.  In the month of September, $75 billion worth of mutual fund redemptions were reported.  That was just for the month of September!  When that happens, mutual fund managers are then forced to sell off positions to cover these liquidations.  Forced sales of appreciated stock equals capital gains passed on to the shareholder.

Rebalance and Reallocate

Lastly, during steep downturns, the managers will attempt to be proactive and reallocate to new positions that they feel are poised to benefit when the market will recover. As a result, a downturn is often the period that you see managers change the focus of their portfolios, which equals taxable events.  Similar to the tech bubble in 2000-2002, expect managers to take gains on energy, materials, commodities, and real estate stocks. Consider These Tax Efficient Strategies:

Investing in Tax-Efficient Funds

One of the best ways is to seek out strategies that display tax efficient characteristics, such as lower turnover, and positive cash flows.  Not only will this equal lower expenses in your funds, but will alleviate the tax burden come year-end.

Tax Loss Harvesting

Tax loss harvesting involves selling positions at losses in order to realize taxable losses to offset taxable gains.  Transaction costs are typically an issue when it comes to this strategy, so tread lightly.  You may also may want to seek council from a tax advisor in regards to this.

Other good reads:

Moolanomy: Lose Money and Pay Taxes on Your Mutual Funds

Good Financial Cents: Letter To Clients: Capital Gain Distributions

Dough Roller: My Annual Investment Portfolio Tune Up

Tough Money Love: Year End Retirement Planning