Alternative Energy Mutual Funds Investment Outlook

While the GDP is expected to be slightly negative over the next 3 quarters to a year there are reasons to believe alternative energy mutual funds should have significant price appreciation in the near future. Let’s examine why:

New legislation has provided extra funds into the banking industry and the credit markets are beginning to show signs of strengthening. This additional source of capital will provide many alternative energy companies with the funds they will need for expansion.

The industry outlook for alternative energy stocks is considered bullish. One of the world’s largest industrial segments is the electrical power industry. The compounded annual growth rate of the earth’s electrical consumption has grown at a rate over 3.2% from 1980 through 2008, while the global electrical capacity has only increased at a rate of 2.8%. Use of electricity is expected to rise even faster as development in China, Japan and Russia continues to grow. The continuous growth of energy demand has led to an energy shortfall. This energy shortfall is leading to research for new and better ways to produce electricity.

According to the International Energy Agency investment in the production, distribution and transmission to meet this increased demand is expected to exceed $11 Trillion by 2030. This, coupled with the desire for independence from foreign oil, constraints of fossil fuels and environmental concerns is leading to significant interest in alternative and renewable energy sources.

Currently, fossil fuel account for 80% of power generation in the United States. Nuclear power accounts for an additional 9%. Legislation in several states calls for 15% of commercial electrical power to come from renewable sources and many states are expected to follow suit. This will further increase demand for alternative energy.

The increased demand for alternative and renewable energy sources leads to potential profits for many companies involved in the alternative energy industry. The lack of history or benchmarks for these companies makes investing in individual alternative energy stocks to be difficult. This difficulty is avoided by investing in alternative energy mutual funds, also known as green energy mutual funds and renewable energy mutual funds.

Mutual Funds: What Are Loads?

Mutual funds are broadly categorized as load funds and no-load funds. Basically, a load is the sales charge associated with buying the mutual fund. Typically, when you buy a mutual fund through a financial planner or broker you will pay a load, which is pocketed by the salesperson or another middleman.

Historically, there has been no significant difference in returns for load and no-load funds. When the load fees are factored into the mutual funds returns the no-load funds have a higher return. This is simply logical if you think about it. If two funds have the same return (as load and no-load mutual funds do) and you have to pay a sales commision on one (the load fund) than the other (the no-load mutual fund) will earn you more in the long run. As an example, if you invest $100 into two funds and each pays you a $10 return you've earned 10%. If one of them charges you $1 when you withdraw you earnings it's real return is only 9%. 10% is better than 9%, no-loan mutual funds are better than load mutual funds.

The most basic type of load is a front-end load mutual fund. With a front-end load mutual fund you pay a portion of your initial investment to buy the fund. Usually front-end load mutual funds charge 3-9% for the priveledge to buy the fund. One a $1,000 investment you lose $30 to $90 before you even own shares. Nice.

Invstors began to realize that paying front-end loads greatly diminished the amount of their investment. Mutual fund companies responded with Back-end loads pay the same 3-9% sales commision, but you only pay when you withdraw the money. Now, if the value of the investment goes up you pay more than you would with a similar front-end load. If the value of the investment goes down you still pay the fees and lose even more of your initial investment.

Even better than back-end loans are contingent deferred sales loads. Basically this is a back-end load mutual fund that says that every year you own the fund your load amount goes down by 1%. Now, this sounds like a good idea if you are planning on holding the fund as a long term investment. Salesmen will often market these saying that you don't have to pay any load, however, every year your account is charge with a 12b-1 marketing fee of about 1%. So, you pay 1% every year you own the fund. For example, a mutual fund has a 5% back-end load that diminishes by 1% annually. You hold the fund for two years. You've paid 2% in 12b-1 fees and now have a 3% back-end load left to pay. Still sounds like 5%, doesn't it? This gets even better if you hold the fund longer than 5 years. You pay that 1% per year regardless of how long you hold it. Really makes you want to be a long term investor, right?

The answer is to look for "no-load" mutual funds. They simply don't charge a load, saving you money and increasing your earnings in the long run.