| Mutual funds are one of the most popular investment | | | | It may not be legal for a mutual fund to trade your |
| vehicles in America. So popular that there are well | | | | MONEY during a down market, but they CAN trade |
| over 10,000 available to choose from! Most articles | | | | the fund's assets. And they do. And they make bank. |
| focus on picking a fund but I'm going to ask a | | | | In fact the trading behavior of institutional investors |
| completely different question. Are the benefits of | | | | is so predictable an entire segment of stock market |
| mutual funds mutually beneficial? | | | | analysts spend their time watching behavior of |
| What is a fund? | | | | institutions and trading off of that behavior. |
| To start let's define what a mutual fund is for those | | | | What Are They Doing With Your Money? |
| readers who may be a little unsure. A mutual fund is | | | | So what exactly are they doing with your stocks? |
| an account (called a fund) where many people pool | | | | Most they are doing one of two things. They are: |
| their money for the purpose of investing. Imagine | | | | Lending your stocks to Short Sellers. When an |
| you want to buy a McDonald's franchise. However | | | | institution has a fund full of stock shares those |
| the cost of opening this store is going to be almost | | | | shares are available to be lent out. And believe me, |
| $2 million. You do not have that much money so you | | | | they do. When it looks like a stock is going down |
| look for partners. Eventually there are 5 partners, | | | | they lend your stock to people who want to sell it |
| each splitting the $2 million startup investment. Then | | | | without owning it. These people are known as short |
| 4 years later the 5 of you decide to sell. You sell the | | | | sellers. When they lend these stocks you know of |
| complete business for $10 million and divide the | | | | course they make profit. In and of itself lending |
| profits 5 ways. That would be a partnership. And yet | | | | stock to short sellers is not a problem. The unfair |
| it's also a good picture of how a mutual fund works. | | | | part is the fact that the institution alone, and not the |
| A mutual fund is a bunch of people who become | | | | fund investors, benefit from this little dealing. So the |
| small partners. They pay in their investment and then | | | | fund manager is lending your stock, and making |
| someone else runs the business - in this case a stock | | | | money, while you sit at home wondering why your |
| portfolio. However there are some partners who | | | | portfolio is getting smaller and smaller. |
| don't pay in. In fact they get paid to not pay in. They | | | | Write Options against it. The second thing funds may |
| are the fund managers and all the people involved in | | | | do is to write options against your stock. They really |
| the business. And that's where the mutual benefits | | | | don't even care how it pans out. Worst case scenario |
| break down. | | | | for the fund is they sell your stock for less than they |
| The inequality comes in the form of SEC rules. | | | | meant. So long as the people make a little profit the |
| According to SEC rules a mutual fund can only buy | | | | fund doesn't care if the people don't make as much |
| stock, hold it, and sell it later. That means a mutual | | | | as they could. And what about the option? Well they |
| fund can only make money when the stock market | | | | make money on that too. Usually 10-20% per month. |
| goes higher. The plan of the fund manager is to buy | | | | That's right, you are settling for 20% each year, |
| low, and sell high. Unfortunately the stock market | | | | while the people managing your mutual fund are |
| does not always go up (just look at the October | | | | making 20% each month with the stock you bought. |
| 2008 market crash). So inevitably the fund's value will | | | | Again, the practice they are doing is fine - but it's not |
| go up and down. At the end of the year investors | | | | fair that they make the money and do not share in |
| are hoping generally for an annual return, or growth, | | | | the profit. |
| of about 15-20%. | | | | There is however a way you can profit from the |
| This description may not sound bad to you. That's | | | | same tricks traditionally held for fund managers. You |
| because you have probably adjusted to this | | | | simply learn the same strategies and techniques and |
| treatment and assume it is "the rules of the game". | | | | do them on your own, without a fund manager. Not |
| After all this is how you have been programmed to | | | | only are these strategies legal, they are done every |
| respond. But what you may not know is what | | | | day by millions of Americans. The difference in you |
| happens behind the scenes. | | | | and them is simply a little education. |