Are Mutual Funds Right for You?

Many Investors are unsure of investing in Mutual Funds. There are so many different Funds out there it can take a good deal of research.

A mutual fund is simply, a collection of bonds and/or stocks.  Through the fund, individual investors join together as a group to invest their money in stocks, bonds and securities.  By pooling their money investors gain greater buying power. Each investor owns shares, which are a portion of the fund’s total holdings.  The fund is professionally managed by a Fund Manager, whose investing track record is documented.

With a Mutual Fund you can make money in three different ways:

1) You can earn income from the interest on bonds and the dividends on stocks. The fund typically pays out almost all of the income it gains over the year in distributions to the fund owners.

2) The Fund Manager can sell securities that have increased in value to earn capitol gains. Most funds also distribute these gains to their investors.

3) The Fund Manager can choose not to sell holdings that have increased in value, the advantage being that the fund’s shares increase in value. Investors can then sell the higher valued shares for a profit.

Mutual Funds – Advantages

Fund Managers-Having professional management of your money is a key advantage.  Most investors do not have the knowledge or time to properly manage their own portfolio. Investing in a mutual fund is a great way for small investors to gain the services of a full time fund manager to monitor and tweak the fund’s investments.

Lower Risk- Owning mutual fund shares helps spread out the investors risk.  Funds are diversified by investing in a large number of assets, typically hundreds of stocks across many different sectors.  A loss in any particular investment is thus minimized by gains in others.

Group Power- Mutual funds buy and sell huge blocks of securities at a time. This lowers the transaction cost greatly over what an individual investor would have to pay on their own.

Liquidity- Your mutual fund shares can be converted into cash at any time upon your request.

Not Complicated- Just about every bank has its own selection of mutual funds offerings for a small minimum investment.  You can also set up automatic purchase plans to invest as little as $100 per month.

Mutual Funds – Disadvantages

Fund Managers- Investors hope that the professional manager is better at choosing stocks than they are. Managers are not infallible, nor do they have a crystal ball to guide them. So even if the fund loses money, the manager still gets paid.

Fees – Running a mutual fund is not inexpensive.  Expenses ranging from the manager’s salary to investors statements cost money and are passed on to the investors.  When comparing various mutual funds pay close attention to the wide range of fees from fund to fund. High fees can have negative long-term effects on your investment profits.

Dilution – Can occur when a successful fund becomes too large and ends up too diversified so that high returns from a few investments can’t properly offset the losses from the other investments. Successful funds often have investor money flooding in faster than the manager can find strong investments for the cash.

IRS – When the fund sells a security, a capital-gains tax is triggered.  This can be a concern for many investors.  You can minimize taxes by investing tax-sensitive funds or by holding non-tax sensitive mutual funds in tax-deferred accounts like an IRA or a 401(k).

As with most investment strategies, investors need to do their homework to determine if mutual funds are right for them.  There are so many mutual funds to choose from that selecting the right one for you can often be overwhelming.  Remember to pay close attention and compare the various fee structures the different funds charge. Also, using one of the many fund-screening tools available will help you pick a mutual fund that fits into your investment strategies.   

Will Congress Toss the Mortgage Interest Deduction off the “Fiscal Cliff”?

The mortgage interest deduction was established to bolster a flagging housing industry and to encourage homeownership and family wealth building. 

Some financial experts however, are starting to question whether the deduction is the best tool to encourage homeownership because it seems to be more valuable to buyers in the higher cost housing markets and thus those families in the upper income brackets generally take the deduction most often. 

IRS data shows that homeowners earning $150K or more claim about half of the mortgage interested deducted.  This income bracket pays 73% of all income taxes.  Homeowners making less than $50K, claim only 8% of the deductions.

IRS data underscores the uneven national usage of the mortgage interest deduction, which is popular in high-cost areas but rarely claimed in areas with low housing costs. The mortgage deduction is available only to those who itemize their deductions, and the numbers work only for taxpayers whose total deductions for mortgage interest, charitable giving and other expenses, are worth more than the standard deduction.  

In states with high housing costs the deduction is used by a much greater number of taxpayers than in areas with low housing values.  Maryland has one of the highest deduction rates with 37% of taxpayers using the benefit, to the low of 15% in West Virginia and North Dakota. 

Lawmakers seem to have forgotten that the mortgage interest deduction is a good policy for their constituents because it brings some taxpayer relief and community prosperity.  A California Association of Realtors survey found that 79% of buyers feel that the mortgage interest deduction was a “key factor” in their decision to buy.  The National Association of Home Builders poll this year also showed that 73% of taxpayers are opposed to any changes in the deduction.

So with that kind of wide public support for the deduction, why would Congress and President Obama be eyeing the deduction as a way to close the gap between what the government spends and what it takes in, to avert the “fiscal cliff”?   According to IRS data, the average mortgage interest deduction is $12,000 a year per taxpayer.  That costs the Federal Treasury a whopping $108 Billion a year in additional un-collected taxes. 

Changing or eliminating the Mortgage Interest Deduction most certainly would have a negative effect on the current real estate market, still fighting its way back from a recession.  The housing market and homeowners have come to rely on the mortgage interest deduction, making it one of the more popular rules in our tax code.  Even a homeowner that does not take the deduction can benefit in a real estate transaction when selling their property to a buyer that is planning to use the deduction.  Having the deduction also helps increase the amount the buyer may be able to pay. 

So if the mortgage interest deduction has helped the real estate industry bounce back, benefits both buyers and sellers, encourages homeownership, wealth building and strengthens our communities… ask yourself...what should Washington do?