Mutual funds have very specific goals for growing money. Usually, a fund selects an index that it wants to mimic and then portrays that as their goal. For example, if a fund decides that it wants to outpace the S&P 500, then the fund holds many similar positions to the stocks portrayed in the S&P, and hopes that by actively managing the holdings, that it can outpace the growth of this index. If the S&P grows by 3.1 percent over the course of a year, and the fund grows by 3.3 percent over the course of that same year, then that fund can deem itself to be successful.
Of course, this doesn’t take into account fees that the fund might charge you. Long-only funds average fees of about 1.3 percent per year, which means that if the fund only narrowly edges out the S&P like it did in the above example, then the investor has actually grown their cash at a slower rate than the economy as a whole. They would have been better off just buying a no to low-cost ETF in many cases. However, putting the issue of cost aside, mutual funds do have several techniques that help profits to stay steady, even during times of extreme market volatility. Here, we will go over one of those techniques and show how it can alleviate risk in your own day to day trading and help you grow your money at a steadier rate.
If you look through a prospectus of a mutual fund, toward the back you will find a section where they outline any non-traditional investment techniques that they employ. One of the more popular methods that you’ll find listed here is called “Forward currency contracts.” Basically, these are just futures contracts employed between two parties that pertain to Forex exchange rates. Here, the fund makes an agreement with a bank or another investment firm to purchase a set number of currency units at an agreed upon price, up to a year or so into the future.
What does this have to do with you? By looking at currency pairs and the fundamentals backing each individual currency, it’s not unreasonable to come up with a certain prediction of where prices are headed. By using long term options, you can offset some of the risk that you will experience over the course of a calendar year and establish “safe” trades that will either offset future losses, or help you to boost your profits. And by revisiting these long term trades a couple times per month, you can always add new positions if needed to help compensate for changes in the marketplace as you go. These are not exciting trades by any means, but they can help you to boost your overall profit rate., and that’s what trading is all about.
Because of the fact that mutual funds are highly regulated, they have certain rules that they need to follow when it comes to growing money for their clients. For example, although these funds are technically allowed to sell stocks short, very few do because of the reporting requirements that follow. This data needs to be outlined in all fund prospectuses and it entails the usage of fund capital as collateral for any short sale. Research shows that mutual funds that use short sales in any capacity have higher fees, too. Usually this is only about 0.7 percent higher, but this extra cost drives away a lot of would-be investors.
So while looking at mutual fund strategy for growing your cash is helpful, remember that you have fewer restrictions for growing your own personal cash. Yes, a mutual fund can often be a safe place to grow your money for retirement, but you are never likely to outpace the general economy when you rely on this. It is a part of an overall sound investment strategy, but for those looking to grow their wealth faster, taking charge with tools like options can be much more effective over the long term in many cases than a long term investment only strategy.