Mutual Funds: Advantages of Mutual Funds
Since their
creation, mutual funds have been a popular investment vehicle for investors.
Their simplicities along with other attributes provide great benefit to
investors with limited knowledge, time, or money. Here are some reasons why
you might want to consider investing in mutual funds.
- Professional Management -
Mutual funds are managed by a portfolio manager and research team who
screen the universe of investments for those that best meet the stated
objectives of the fund. Investors purchase funds because they do not
have the time or the expertise to manage their own portfolio. A mutual
fund is a relatively inexpensive way for a small investor to get a
full-time manager to make and monitor investments. Some managers will
guide the fund to a sterling performance for so long that the managers
practically become a celebrity. Warren Buffett, who practically runs
Berkshire Hathaway, returned to investors average annual return of
around 30% for over 35 years (Berkshire Hathaway is a stock traded on
NYSE, but since it owns quite a bit of private and publicly traded
companies that it's sort of like a big mutual fund). Another good
example is Peter Lynch, who retired from Fidelity Magellan fund in
1990 after 13 years of returning it's shareholders with over 29%
annual gain. Other funds bear the names of founders who established
their credentials as stock market gurus before starting their own
mutual funds. John Templeton, and Mario Gabelli are good examples.
- Automatic Diversification -
The most basic level of diversification is to buy multiple stocks
and/or bonds rather than just one. Mutual funds are set up to buy many
stocks and/or bonds. By owning shares in a mutual fund instead of
owning individual stocks or bonds, your risk is spread out. The idea
behind diversification is to invest in a large number of assets so
that a loss in any particular investment is minimized by gains in
others. In other words, the more stocks and bonds you own, the less
any one of them can hurt you. Large mutual funds often own over 100
stocks in many different industries. It wouldn't be possible for an
investor to build this kind of a portfolio with a small amount of
money. Mutual fund investing enables you to achieve high level of
diversification with the highest possible return at lowest possible
risk.
- Liquidity with Low cost - With
mutual fund you can convert your shares into cash at any time. Because
a mutual fund buys and sells large amounts of securities at a time,
its transaction costs are lower than you as an individual would pay.
You can avoid paying sales commissions (known as loads) by buying
no-load mutual funds. The most efficiently managed stock mutual funds
cost less than 1 percent per year in management fees (It costs even
less usually around .20 to .50 of a percent to invest in index funds).
-
Flexibility - Among the thousands of mutual funds, you can
choose a risk level that is comfortable to you. If you are
investing for a long term such as retirement, you may want to invest
more heavily in stock funds. If you are retired already and want
income, you may want to invest conservatively by putting your money in
bond funds. And with a money market fund, you are sure not to lose
your invested money (known as principal). You may also mix and match
different type of funds to meet your financial goals.
-
Simplicity with minimal investment - You can buy and sell funds
through a broker, a bank , by mail or online. Buying a mutual fund is
easy! Just call the 800 number to get the forms and sent a check to
that particular mutual fund company (such as vanguard) or you can open
a brokerage account with a discount broker (such as Waterhouse
Securities) and buy hundreds of mutual funds from different mutual
fund companies. Almost any big bank also has its own line of mutual
funds, and the minimum investment is small (especially for retirement
accounts). Most companies also have automatic purchase plans whereby
as little as $100 can be invested on a monthly basis.
-
Automatic reinvestment of earnings and payment Plans - Dividends,
interest and capital gains distributed by mutual funds can be automatically
reinvested for you in more shares. Reinvesting earnings should be a crucial part
of your investment goals for the long term. Also with mutual funds, you can
receive regular income from your shares at fixed interval. If dividends and
interest aren't enough to cover the payments, the fund will sell enough shares
to cover them.
-
Easy access to information - Prices for mutual funds are published in
the newspaper everyday, just like the prices of the stocks and bonds. You can
also see their results over periods ranging from a month to ten years in list of
magazines that publish comparative fund performance information in every single
issue. Money and Kiplinger's Personal finance Magazine publish a
monthly list of top performers in various categories. Majority of the funds have
a toll-free numbers you can call to requests information about the funds and
mutual fund companies are required to sent you a prospectus (contains almost
everything you want to know about the fund: fees, past performance, it's
objective, etc.) before selling you any shares. Majority of mutual funds will be
happy to hear from you, especially if you are a shareholder.
Next-->>
Disadvantages of Mutual Funds
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