Investment Strategy Series 2011, 2012- Investing in Stocks and Bonds Funds

If you are a conservative investor then bond funds suit your risk profile whereas stock funds are ideal for aggressive players only. No doubt, stock funds grow more in value over the long time frame. But its ideal to stay invested in both type of funds, as one can never be sure which of these will perform better in the short run.

Well, you should not go about investing in any fund making news or being advised on financial media, rather opt for the ones that weigh good after evaluating on below mentioned parameters.

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What Should You Look for in a Stock Fund?

• Stock Funds with least expenses should be your ideal picks. Funds with puffy expense ratios are usually self centred, they can hardly work in mutual interest, which is otherwise the core objective of Mutual Funds. Higher expenses simply mean that you will get lesser share of profits.
• Past performance usually reflects the strength and intellect of money managers behind any fund. Comparing five year performance of different funds with similar holdings is the best way to identify outperformers. Remember, it makes no sense to compare a large cap fund with a small cap fund, so comparisons should be made among peer groups.
• Choose a fund that has a history of sticking to its initial objectives or the disclosed investment plan. This is important as you would never want that the money you invested in a growth fund is allocated in a blue chip stocks or elsewhere.
• Opt for funds with higher tax advantages. The money you make by saving on taxes is a big portion of your annual returns.
• Risk is the most important parameter to measure before placing bets on any fund. Even when dealing in high risk funds, mainly small cap and growth funds, you need to check the historic volatility of various funds before making a choice as not all funds in same category have the same beta. Beta and standard deviation are two measures that determine how risky the fund has been in the past. The higher the two of these point, more is the risk attached.

How to choose among Bond Funds?

Being one of the best investment options for low risk types, bond funds can often yield tempting returns. They are surely a better alternate to savings and CDs. Here are a few parameters that should be looked upon before finalizing on a fund.

• Just like in stock funds, low expense ratios are the key to a good bond fund. As the returns are usually lower here, higher managing costs make these unattractive.
• As said earlier, sometimes the returns on these can be tempting as fund managers try to attract investors by enhancing short term performance by following risky strategies. One thing that is very certain about bond fund investors is that they simply cannot accept higher risk. Abnormally high returns should raise an alarm and you should avoid such funds at every cost as such performance cannot be sustainable.
• Whether your view is long term or as short as five years, you need to hold on till maturity as in between the returns can be very volatile. So switching between funds makes no sense at all.
• Domestic bond funds can double your money in over 10 year’s time frame whereas international funds can do that in just about 5 years. But the choice is yours as risk increases when you invest overseas.

Conclusion:-

Looking at the current state of domestic economy it is still not clear whether we will continue with the recovery that has panned out well over a year or if a second dip is around the corner. Investing in this climate is certainly confusing but sitting on cash and losing value with the falling dollar is even harder. The best way to deal with economic scenario in 2011 is to diversify with different mutual funds, may it be Bond Fund, Stock Funds or Index Funds.

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