Newbie questions on Index/Mutual Funds

[colly]

I have recently started looking into the possibiliy of investing in Index/mutual Funds - but I am very new to it and also trying to learn more and find out more information. Does anyone know much about these? Any useful information would be apprecited.

A few questions:
What are the main differnces between mutual and index funds?
Should I stick with Irish ones or shall I investigate US ones through my etrade account?
Is there generally a minimum amount you can invest in (I have about 5k). Can you add more money to this fund on a monthly basis, like a savings/investment account?
Are you 'locked in' for a certain amount of time or can you switch or cash out at any time?
What should you look out for in regard to management fees etc?
What do I look for in a fund to maximise growth?

Some Irish links I have come accross so far as as follows:
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Edit: Here are some some links I have just found that look like intersting reading and might be usefull to others intersted in same:
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http://www.getrichslowly.org/blog/20...s-index-funds/
http://en.wikipedia.org/wiki/Collect...estment_Scheme

Any and all advise appreciated
Thanks

 

[ThomasB]

Hello colly,

Index fund: a fund that aims to follow the performace of a particular stock market index: e.g. ISEQ, FTSE, S&P 500. They are normally not actively managed by a professional fund manager.

Mutual fund: where an investment company pools your money with other investors. They are managed actively by fund managers to (theoretically) maximise gain. They are often 'themed' by sector and geography. They are by far the most common equity investment vehicle in Ireland.

As to differences in performance, well it really depends on how much you trust fund managers' abilities to 'beat the market'. Many financial providers would like you to believe that active management of stock portfolios can provide better returns. Other people, including the authors of some of the links you provided, and many posters on AAM, believe that most mutual funds fail to beat the market and index funds are a better choice.

Personally, I have invested my money in index funds, as I am not too optimistic about the abilities of fund managers.

I don't know much about funds in the US, or the logistics in investing with a company based in another jurisdiction. However you might want to bear in mind that Irish financial institutions charge fees that would make our American friends laugh out loud: the common management feee for mutual and index funds over here is at least 1%: Americans investing in index funds would pay at most half of that.

One product that you might want to consider that allows you to invest both lump sums and regular amounts, that allows you to pull out your money at any time without charge (Like all products though, you will be charged 23% tax on your gains!), and that charges comparitively low management fees, is Quinn Life's Freeway product. You can find out more at

I don't have any connection with the company, but I do invest my money in the Freeway product.

When you invest in an index fund, it is considered by many very important where you invest your funds at the beginning. You would do well to consider diversification so you're not exposed too much to one economy, sector or industry (many indexes have over-representation of certain sectors -- banks for example).

Personally I went for 50% for the Irish stock index tracker and 50% in a tracker for European stocks. I'm sure many here would consider that too limited (especially being so vunerable to the Irish economy!) and would advise investing in other markets as well. Personally I like the simplicity, and I believe that a transfer of investment from property to equities in Ireland (to bring us more in line with other countries) will ensure a healthy Irish stock market performance for the medium term. Everybody will have their own philosophy though, many would consider my approach foolhardy. Best to come up with your own choice.

(edit: Check out this AAM thread where lots of people give their fund investment choices with Quinn Life and which contains lots of very useful advice)

The last thing I would say about index funds is that they are medium-long term investments. And, although it's not likely, you could lose all your money as index funds do not offer a guaranteed return.

I hope the above helps. Happy investing!

 

[Foxtrot]

Keep in mind that currency risk will greatly affect the value of funds purchased in America. If the American dollar continues to depreciate in value relative to the Euro over the long term, the value of your investments will also. This can also work to your favour if the value of the dollar increases, but it looks like many economists and economies at the moment. Conventional wisdom seems to be that you should invest the majority of your nest egg in the currency you plan to retire in, and diversify a small proportion among funds denominated in other currencies, including emerging markets as well as established ones like the US. The ultimate mix depends on what your savings goals are, what other assests you have, your risk tolerance, etc. How long are you planning to invest? If you are looking to use this money in the next couple of years any stock based investment product might not be appropriate for you.

With 5k to invest, I would stick with something fairly diversified from a large, reputable company for the time being, like a Euro based index fund (Like ThomasB mentioned, Quinn-Life is very popular and reasonably priced). You can also purchase a Euro based ETF (exchange traded fund) like the ones lyxor offer. There's a lot of good information on here already about index trackers and ETFs if you search the threads. Good luck!