Tips For Home Loan

Loan’s application declined to RM45.26bil from RM47bil!

The Bank Negara had showed on their website that loan approvals’ percentage for residential properties in the country declined to 46.8% in the first half of this year from 50.1% during the same period in 2011. While the application for loans for residential properties purchases increased by 2.9% but the actual loans approved during the six-month period declined to RM45.26bil from RM47bil in the same period in 2011.

This is evident when our clients have to resort to different banks when they buy their properties and this prolonged the property transactions period.

Whydeclinedandhowitisassessed?

One of the reasons for the increasing numbers of bank loan disapproval is because of the recent change of policy by Bank Negara to use Net Income instead of Gross Income of borrowers in approving loans.

From our recent meeting with a local bank manager on this policy, he explained that if a person:

• Has a salary/total income of RM3,000.00 a month (after deductions of EPF and SOCSO)
• Has a car commitment of RM500.00 a month
• Other commitments of RM1,000.00 a month (house, credit cards etc)
• His net income would be RM 1,500.00 but the bank will take 70% out of this net income to calculate his eligibility for another loan. That would mean the person is eligible for a loan of monthly instalment not more than RM1,050.00

Of course this calculation is just a guide and different banks have different rules in calculating a person’s eligibility.

Based on a this person’s net income of RM1,050.00 and on the basis of a tenure loan of 30 years and interest rate of BLR-2.4%, he is eligible for a housing purchase of RM230,000.00 (with 10% down payment).

In getting your bank loan approved, there are four factors that you must be prepared:

1. Your Net Income
2. Proof of your Net Income
3. Your Purchase – it must not be risky in the view of the Bank.
4. Your Credit Rating

To help you in getting your loan for residential purchase approved, we compile for you 20 Tips to Increase the Success of Your Home Loan’s Application based on our interviews with bankers, investors and experience in dealing property transactions.

While we cannot do anything on the increasing price of properties in Malaysia nor can we ask our Boss for a raise of salary in light of the inflation of our country (you can try, if you want to!), we can only work out other ways.

#Tip 1 – Sort out Your Eligibility

Before you commit yourself into any purchase of property, sort out your eligibility first. Get advice from your banker and get them calculate your loan’s eligibility and work out how much the price of a property you can afford.

Approach different banks and let them review your credit eligibility. You must be honest with them and tell them your salary, income and total expenses. There is no point in getting your bank loan approved based on false credit report while you struggle to pay your bank loan later.

Our illustration above on the net income can also be a guide to determine your purchasing power.

Based on your eligibility, if you know that you can only settle for a property priced at RM 250,000.00, don’t try to make a purchase of RM 450,000.00.

Also, you need to take into consideration of the hidden costs involved in acquiring your property.

#Tip 2 – Build Your Passive Income

The rule of Net Income is simple:

Net Income = Salary – EPF – Monthly Tax Deduction (PCB) – SOCSO

They will then use your net income to derive your Loan Repayment Ratio/Debt Service Ratio = New + current loan repayment commitments/Net Income

It’s either you cut your expenses and liabilities (such as credit cards instalments, car commitments etc) or you build your income.

While it is almost impossible for you to speak to your Boss in front of his face and ask for a raise in your salary (you can try!), what is better for you to do is build your passive income or other side income. While you can work part time during the night or weekends, what is better for you to do is build your passive income – income that you can earn without you having to work for it.

There are many ways you can do this:-

• Rent out your empty rooms in your house
• Build business – can start small by having a stall selling fried chicken manned by another and expand to having several stalls
• Write eBooks or create products and sell online
• If you already own several properties, your rental income can be part of your passive income – but be ready to deal with problematic tenants!

The opportunities are endless. It’s just a matter of whether we want it to happen.

#Tip 3 – Cut down your expenses, liabilities or commitments – Bad Debts

Robert Kiyosaki – the author of Rich Dad, Poor Dad said in this book we need to identify which is bad debt, which is good debt.

“Get rid of debt,” that’s Robert kiyosaki main advise, but you have to distinguish between good debt and bad debt:

“If you’re financially educated, like my rich dad, you know there’s good debt and bad debt. Bad debt makes you poor,” Robert Kiyosaki says. “Good debt makes you rich. Today, I’m hundreds of millions of dollars in good debt.”

“Good debt puts money in your pocket, and that’s the difference,”

Robert Kiyosaki is a real estate entrepreneur and co-author of “Rich Dad, Poor Dad

While many of us cannot restrain from buying or spending on things we think we should own after working so hard to earn our income and use credit cards or make purchases on credit, we should stop and think whether what we are buying good debt or bad debt.

If your car loan and additional costs of owning a car is taking up half of your income, maybe you should ask yourself whether you should settle for cheaper car or means of transportation.

If your purchases on credit term are eating up half of your salary, you should ask yourselves whether what you have purchased is a good debt or bad debt. Maybe you should sell off your items and settle the credit card or purchase second hand goods in future for a lesser price.

# Tip 4 – Joint Purchase with Your Spouses, Children, Parents, Close Friends or Partners

If your credit eligibility is RM 250,000.00 and your wife is earning similar income, you can joint purchase the property with your wife. The combined credit eligibility would be RM 500,000.00 and you can easily acquire a loan of RM 400,000.00. You can also joint purchase with your children, parents, and close friends or with investment partners.

The only thing is – make the joint purchase with someone you can trust and get a good lawyer to draft your agreements of share.

# Tip 5 – Make Higher Down payment

A higher down payment would mean lesser loan amount and instalments.

Settle for a higher down payment if you could – this can either from your EPF withdrawals, insurance fund withdrawals, borrow from your parents and or relatives (but not Ah Longs, please!).

In proper finance strategy, you can also refinance your current property and use a portion of your money from the refinancing for a larger down payment. To do this, get proper advice from your banker and wealth advisers before you commit anything.

# Tip 6 – Longer Tenure

You can stretch up your loan to 30 or 40 years tenure and spread out your instalments. Some bank also offer loan up to 60 years or 70 years of age. Of course the longer your loan tenure is, the higher the interest you need to pay.

But believe it or not, with the inflation rate of our country plus the law of scarcity your property would be priced at the same price of your total payments or more by the time you settle your loan. You can also make prepayments with your EPF money to shorten the tenure and interests when times come.

# Tip 7 – Look For Bargain Property

The No.1 investment advice is –

“Buy low, sell high!”

While it is almost impossible to find bargain properties nowadays, it is still possible for you to find one if you go further looking for one. There are still people who would sell their properties for lesser sums for many reasons – migrating, in need of money for business, divorcing etc.

We once had a client who sold his property at a price much lower than market value because of matrimonial matter.

These properties normally won’t go public and even if it does, it would be taken up very fast. So the key is networking.

# Tip 8 – Negotiate with the sellers or come to an arrangement with the sellers

Some sellers or vendors are friendly and good enough to make some arrangements in your favour. This can be an arrangement for say you pay the vendor a larger sum of down payments but in instalments over a fixed period, with or without interest. In this way, you need not obtain higher margin of loans and it’s easier to get your loan application approved.

Also, the bank is able to see your commitment in buying this property as they may think that you have paid large down payment to secure your property. In this circumstance, it is very unlikely you would want to see your property being auctioned for defaults of payments.

Or, maybe make the Sale and Purchase Price higher to get a higher loan so you don’t have to pay for the down payment? But this may work against your objective as the main concern here is about getting your loan approved – the only reason it is not approved is because you’re borrowing too much. So unless you find one undervalued property, it is very unlikely that you will be able to use this strategy as bank normally value the property lower than the sale and purchase price.

# Tip 9 – Shop for Banks just like how you shop for clothes

Don’t settle for only one bank. There are plenty of banks in our country both local and international banks. Some banks albeit Bank Negara policy, maintain lenient policy in approving bank loans than the other.

It is advisable that you always approach banks and get their letter of offer before you sign any Sale and Purchase Agreements or bookings. Negotiate with the seller to allow you a certain time to get bank loan while reserve the property for you. Once you get the letter of offer from bank, you need not to worry about losing your booking fees in case of failure of getting a bank loan.

If you approach more banks, you will be able to compare their interest rates and other benefits and get the one benefited you the most.

# Tip 10 – Look for Tenanted Property

This is common for many investors. If you are new in investment and is buying the property for investment purpose, settle for a property currently tenanted. You may be thinking why the landlord would sell the property while he is earning passive income. This could probably because the landlord is adjusting his portfolios; he needs large sum of money to finance his other purchase or for his children tertiary educations. The reasons are endless; you just need to find the right property.

If the property is currently tenanted, this can be part of your guaranteed future income which most banks will take into consideration. Show to the bankers the Tenancy Agreement. The longer and higher rental the property is currently tenanted the better. If it is rented to good companies like 7-11, even better.

# Tip 11 – Have Proper Bookkeeping

The bank normally wants to see your income statements to determine your credit eligibility. While some may only ask for your pay slips, most would require you to produce your income tax statement/report.

In this case, you cannot lie to your bankers about your total commitments because they can check your commitments (other existing loans) from their integrated system linked to Bank Negara.

If you could produce to your bankers your detailed financial statements including your total incomes, total expenses – this would help in assessment of your credit eligibility because the bank doesn’t have to estimate or second guess your expenditure and can make correct assessment of your credit eligibility.

# Tip 12 – Report and Pay Your Tax Accordingly

Nowadays banks are stricter in assessment of their customers’ credit rating.

They request customers to produce their income tax statements. If you’re a business owner and you tell your bankers you are making RM 500,000.00 a year but if you only report your profit as RM 250,000.00 as reflect in your income tax statement, the bankers would take the RM 250,000.00 in their assessment.

Therefore, unless you have better solutions and are not leveraging on the bank’s money in your property purchases, it would be wiser for you to report your profit accordingly and pay your tax accordingly.
Get proper advice from Tax consultants to assist you in this matter.

# Tip 13 – Pay your Credit Card and other commitments on time

Always maintain a good credit rating by paying your credit card and other commitments (loans) on time. When the bank lends you the money, they want to ensure that their money will be paid back on time. This is the risk that the bank needs to evaluate and it makes sense that if you’re a good payer who pays on time the bank will love you to be their customers who borrow from them. They know that you will be able to pay what you borrow and make money for them.

It is often very difficult for a person who does not pay on time or who has been blacklisted from the bank or other banks to get their loan approved.

Mind you that they have an integrated system that is able to track your history or track record with other banks or at least they know whether you’ve been blacklisted.

# Tip 14 – Pay off your credit cards!

This is interrelated with # Tip 3 and # Tip 12. If you are buying too many things on credit cards and by instalments or easy payments, beware that your loan application may not be approved. Simply – the bank think that you have too much commitments and aren’t good at financial management. They may also think that you may somehow unable to pay your credit card and the loan. So unless and until you can prove to the bank that you’re earning more than you spend, be careful when spending with credit cards as your may go on with shopping spree and splurged your spending budget.

# Tip 15 – Build and maintain good rapport with bankers

It is very important for you to build and maintain a good rapport with bankers. They are the ones who will facilitate and in some situations approve or involve in the process of approving your loan applications. If you could build your rapport and they trust you being a good payer, this may help in your loan getting approved.

Also, if you build your rapport with fellow bankers, they will help you in persuading their superiors to approve your loan or get their superiors to review your loan applications. If they don’t know you, most of them would ignore your application once their superiors disapprove the applications.

# Tip 16 – Readjust your portfolio

If you own too many properties with the bank’s money and they are generating negative cash flows for you, you may need to readjust your portfolio. It may be wise for you to sell off your negative cash flow property or those not making money neither appreciate in value to cash your new purchase. This way, the bank will be able to see that you’re more than able to finance the loans.

# Tip 17 – Have a Guarantor who has good financial background

To ensure that your loan is approved, you can also get a guarantor for your loan. Of course this person must have good or positive income statement. If in the absence of you paying the bank loan and you have a guarantor who is capable of paying the bank loan then it is very likely that the bank will approve your loan application.

Be wary that a guarantor will be liable for the instalments in default of you paying the loan and is also liable to be sued for bankruptcy. Further, this guarantor’s credit eligibility will be taken up by being a guarantor for your loan. This means that if he becomes a guarantor for your RM 300,000.00 loan, this RM 300,000.00 will be taken as his own loan when the banks assess his loan application.

# Tip 18 – Choose your location of property purchase wisely

When buying your property, always follow Ho Chin Soon Real Estate Mantra–

Location, Timing and Branding!

This is also particularly important when getting your loan approved.

Some banks only finance purchases of properties in certain locations. Some banks also look at who are the developers. This is logic considering that banks are money making institutions and they want their money to be safely returned. If you make purchases at secluded area at high price but with no potential to grow, the bank will be wise not to lend you the money.

The same is true if you make purchases from developers who are popular for not keeping their promises or new developers who cannot prove their credibility, the banks are unlikely to lend you the money to purchase properties from these developers.

The rule is simple – if you can’t pay the loans, can the bank recover the money back by auctioning your property? If they can easily auction your property means they are likely to lend you the money. If they think there is no taker for your property, they won’t lend you the money. They always think of the exit route before they make an entrance.

# Tip 19 – Shop for Loan Packages Just Like How You Shop for Combo Meals

There are many types of loan packages offered by different banks. Some offer graduate loans that only require you to pay less in the early years and gradually increase over the years, others offer Islamic loan or interest only loan for under construction properties. Whatever package you choose, choose the one that you think best suit you taking into consideration of the interest rates and sum of instalments.

If you believe you are only able to pay less in the early years as you have just graduated with a degree and you strongly believe that your salary will increase as times goes by, take up this package. The bank will very likely approve your loan based on this package instead of approving your loan with high instalments in the early years.

If you think you can flip the property after the property is completed but you don’t have strong ability to finance your property during construction, take up the ‘interest only’ package albeit the higher interests.

# Tip 20 – Be Confident!

This is going to be the last tip – be confident in whatever you do – just like when you present your case to the banker!

Show your confidence in your ability to pay the instalments by supporting your applications with various documents. Show to the bankers that you’re able to finance your property just like how you tender your proposals for your boss to accept your idea.

Bankers want to hear their investment in you will reap fruits. So tell them that their investment by lending money to you will not make them suffer losses.

Lastly,

Plan your exit before you enter. As Robert Kiyosaki always say ‘has an exit strategy in mind’  in whatever business you do.

We hope you can get your loan approved in no time and own your very dream property.

To prepare yourself in purchasing your property, read our 7 Steps Your Must Know When Buying Your Dream Property!

Give us your feedbacks and or comments regarding the tips we have given. Either way, if you have something to add on, let us know! We would love to hear from you!

How To Invest

Got only $20 to put away right now?

It may not sound like much, but you can use it to buy shares in Intel. Or Johnson & Johnson. Or Harley-Davidson (you rebel). And those are just a few of more than 1,000 options available. What if you've got $100 -- or $1,000? Your options are even greater.

We're not here to tell you where to invest your money. We won't lay out a handful of stocks on a "buy" list. But what we can tell you is how you can invest your money -- the mechanics of investing small, large, and medium amounts of cash. We can even help you choose a broker.

How to invest $20Let's start with $20. We're going to assume that you've already paid off any high-interest debtand that you have some money stashed in a safe place (like a savings or money market account) that you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough, and you want to begin investing for your future.

Is it even worth it to invest such a pittance?

Heck yeah it is! One of the best ways to invest small amounts of money cheaply is through Dividend Reinvestment Plans (DRPs), also known as Drips. They and their cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.

More than 1,000 major corporations offer these types of stock plans, many of them free, or with fees low enough to make it worthwhile to invest as little as $20 or $30 at a time. Drips are ideal for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.

Drips may be one of the surest, steadiest ways to build wealth over your lifetime (just make sure you keep good records for tax purposes). For more details on Drips, see "What if I can only invest small amounts of money every month?"

How to invest a couple of hundred bucks
So you've weeded out all the wooden nickels from your spare-change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund (the only kind of mutual fund Fools like). An index fund that tracks the S&P 500 is your ticket to an investment that has traditionally returned about 10% per year.

Some index funds require as little as $250 for you to call yourself an owner. This low minimum is usually restricted to IRAs (Individual Retirement Accounts). After your initial investment, you can add as much money as you like, as frequently as you like, with no additional costs or commissions. You purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman.

If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (500 companies!) portfolio.

How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and now you'll have your pick of fund companies that require higher initial investments. This freedom will enable you to shop around for a fund with the lowest expense ratio.

You should also seriously consider opening a discount brokerage account. You'll want to focus on the account option that best serves your needs; some accounts require a minimum initial deposit, and some don't. That means you can open up an account with whatever investing money you have available, and start researching and perhaps purchasing individual companies. (Or, if you're enamored of index investing, you can easily invest in Spiders, a stock-like investment that mimics the performance of the S&P 500.)

The key here is to keep your costs of investing (including brokerage fees) to less than 2% of the transaction value. So if you're planning to add to your position in stocks a few times a month, a Drip or an index fund may still be the way to go.

How to invest $1,000-plus
What can you do with a grand? Obviously, with $1,000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment.

Say you've got 40 years to retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have $532,111.07. That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on that $532K when you withdraw it. (As always, your mileage may vary.)

Again, even at this level, the key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions, stamps to mail in checks, and books that help you learn to invest) are less than 2% of your account's overall worth. With small accounts, that can be a challenge, but with such low commissions being offered by discount brokers, it's definitely doable.

The Secret to Growing $50,000 Into $900 Million...
At the age of 38, a middle-class insurance man from Peoria, Illinois, quit his day job and invested $50,000 in the stock market just as everyone else was plowing their money into bonds. When he died in 1994, his stake was worth over $900 million.

Now, Motley Fool Co-founder and CEO, Tom Gardner, wants to send you a free copyof a book that reveals exactly how this little-known investor did it — and give you the chance to join him and a small group of dedicated Fools who are on a unique quest to replicate this incredible investment success. Simply enter your email address below and we’ll send you all the details.

Bankruptcy

How Does Bankruptcy Work?

Bankruptcy is a legal process intended to help individuals and companies who are unable to meet their debt obligations. Bankruptcy can help you get control of your financial situation and help you maintain possession of property to which creditors might have a legal claim. The process can have very negative effects on your ability to borrow money for quite a long time (up to ten years), but there are circumstances where bankruptcy might be the best option.

There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. The two types work quite differently. When filing for Chapter 7, most of your unsecured debt disappears within 90 days. However, much of your property, including your home, will be sold off, with the proceeds distributed to your creditors. Basically, anything you have that is worth much at all will be sold to pay creditors. In addition, a Chapter 7 bankruptcy stays on your credit report for ten years. So Chapter 7 bankruptcy is no laughing matter.

A Chapter 13 bankruptcy lets you keep your property. This form of bankruptcy is a debt repayment plan, rather than a debt eliminator. With Chapter 13, you generally set up a three or five year repayment plan, and the bankruptcy only stays on your credit report for seven years. If you own property that you do not wish to relinquish to creditors, Chapter 13 may be your best option. Chapter 13 is also a better option for those who are having temporary difficulties but anticipate better times ahead because it has somewhat less of a long-term impact on credit ratings.

If you do not own a lot of property or are comfortable with the idea of relinquishing your property, then Chapter 7 may be the best option. It creates the best financial circumstances, from a debt management perspective, because it erases your debt. You are no longer responsible for debt repayment. How much property you must give up depends on the laws of the state where you live. But forget about moving to a state with better consumer bankruptcy laws in order to get a better deal. If you've lived in a state for less than two years, then you must abide by the bankruptcy laws in the state where you formerly lived.

If your credit score is already ruined from multiple missed payments or from being in default with creditors, then declaring bankruptcy won't have much of a negative impact on your credit score. In fact, it might even help your credit score. This is because once your declare bankruptcy, your balances and records of unpaid debts are removed. All of those debts will be marked as being included in a bankruptcy. So even though having the bankruptcy on your credit report is very negative, it may be offset by the removal of multiple active bad debts.

Since you are basically starting from scratch, you have the opportunity to begin rebuilding your credit anew. A good way to begin that process would be by acquiring a secured credit card. After being careful to make all your payments on the secured card for a year or two, you will be in position to apply for an unsecured card and continue the process of rebuilding your credit. Eventually, after seven or ten years, the bankruptcy will slide off your credit report. If you have made timely creditor payments in the meantime, then your credit will be restored

Gold Investment In Malaysia

 Written by iMoney Research Team

Gold investment is growing in popularity. At the time of writing this (1 June 2012), the gold price is at US$49.93 (or RM159.58) per gram. Only 5 years ago, gold price was around US$20. Had you invested in gold over this entire period, you would’ve made a profit of almost 150%!

Many Malaysians have asked the iMoney team how they can invest in gold without actually buying physical gold bars or gold bullions. After all, the risks of physically holding on to gold bars as an investment can be very, very high!

In Malaysia, some banks offer gold investment accounts, which allow you to buy and sell gold without actually ever owning the physical bars. The iMoney team has identified five Malaysian banks that offer such gold investment accounts:

1. UOB Bank Premier Gold Account or Gold Savings Account
2. Public Bank Gold Investment Account
3. Maybank Gold Investment Account
4. Kuwait Finance House Gold Account-i
5. CIMB Bank Gold Deposit Account

Choosing the right bank for gold investment in Malaysia

While these products may seem similar to each other on the surface, they can in fact be quite different. Kuwait Finance House, for example, uses a generic gold bullion that has a gold purity level of 99.5%, while banks like UOB Bank, Public Bank and Maybank all claim a gold purity level of 99.99%.

Another important point when choosing between banks is to look at the bank’s “buy-sell spread”, which is the difference between the price you pay when you buy gold, and the price you receive when you sell gold.

For example, if it costs RM160 to buy a gram of gold from Maybank, and at the same time, Maybank would only pay you RM150 when you sell a gram of gold, the “buy-sell spread” would be RM10. Sometimes, this “buy-sell spread” is expressed in a percentage form.

To maximise your profits, choose a bank with the smallest “buy-sell spread”.

Lastly, pay attention to hidden fees and charges. Some banks like UOB Bank and Public Bank will charge you a fee if your gold balance (i.e. the amount of gold investment you have in your gold investment account) falls below a certain level. Others like CIMB Bank may charge an early account closing fee if you choose to close your account within 6 months.

Keen to get started? Want to know which bank offers the best deal for gold investment in Malaysia? Check out iMoney’s Gold Investment Account

What Is a Mutual Fund?

As a popular investment option, you have probably already heard plenty about mutual funds. Chances are you own mutual funds in your retirement plan or brokerage account. In fact, according to the Investment Company Institute, more than 92 million individuals in the U.S. (about 45% of U.S. households) owned mutual funds in 2008. But do you know what mutuals fund are and why so many people own them?

Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the fund’s assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund’s prospectus.

Fees of Mutual Funds

All mutual funds charge fees to operate and manage the fund. Management fees pay the fund companies (or managers) to manage the funds. Some funds also charge investors an upfront sales charge/loadwhen he/she first purchases shares in the fund, while other funds charge a back-end load (contingent deferred sales charge) upon sale of fund shares. There are also funds that have no sales charge and these are known as “no-load funds.”12b-1 fees are imposed by some funds to cover marketing and distribution costs. There are also various share classes of funds that differ in fee structure according to class (Class A, Class B, Class C, etc.)

Structure of Mutual Funds

Technically, mutual funds are “open-end” funds -- one of four basic types of an investment company.Closed-end funds, exchange-traded funds and unit investment trusts are three other types. As investment companies, mutual funds are regulated under the Investment Company Act of 1940.

Regulation of Mutual Funds

Regulation of mutual funds, compared to other pooled investment options (think: hedge funds) is extensive. Mutual funds must comply with a strict set of rules that are monitored by the Securities and Exchange Commission. The SEC monitors the fund’s compliance with the Investment Company Act of 1940, as well as its adherence to other federal rules and regulations. Since their development, the regulation of mutual funds has provided investors with confidence in terms of the investment structure.

Diversification of Mutual Funds

The beauty of mutual funds is that you can invest a few thousand dollars in one fund and obtain instant access to a diversified portfolio. Otherwise, in order to diversify your portfolio, you might have to buy individual securities, which exposes you to more risk and difficulty.

Another reason to invest in mutual funds is their adherence to a basic principal of investing: Don’t put all your eggs in one basket. In other words, many different types of investments in one portfolio decrease your risk of loss from any one of those investments. For example, if you put all of your money into the stock of one company and that company files for bankruptcy, you lose all of your money. On the other hand, if you invest in a mutual fund that owns many different stocks, it is more likely that you will grow your money over time. At the very least, one company’s bankruptcy will not mean that you lose your entire investment.

Professional Money Management of Mutual Funds

Many investors don’t have the resources or the time to buy individual stocks. Investing in individual securities, such as stocks, not only takes resources, but a considerable amount of time. By contrast, managers and analysts of mutual funds wake up each morning dedicating their professional lives to researching and analyzing their holdings and potential holdings for their funds.

Variety of Mutual Funds

There are many types and styles of mutual funds. There are stock funds, bond funds, sector funds, money market funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index funds). The availability of different types of funds allows you to build a diversified portfolio at low cost and without much difficulty.

While you have a plethora of investment options (individual stocks, ETFs, and closed-end funds, to name a few) mutual funds offer a simple, efficient way to invest for retirement, education or other financial goals.