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The Mutual Fund
What is a mutual fund anyway?
Mutual funds are a collection of stocks,
bonds or other securities owned by a group of investors and
managed by a professional investment company. When you put
money into a mutual fund, it is grouped with investors to
give you a lot more buying power than you would have if investing
on your own.
Each mutual fund has its own strategy and
investment objective for making money. Because a fund can
consist of the ownership of hundreds of different securities,
its success isn't dependent on how one or two stocks or bonds
perform. Fund managers consistently monitor the performance
of your fund(s) and make adjustments to generate the strongest
possible performance.
Mutual funds are bought in shares like stocks
and can make you money in three ways:
- By earning dividends or interests on
its investments
- Distributing its profits (after fees
and expenses) to its investors
- Increasing in value per share
Playing in the Sand: Advantages of Mutual Funds
Diversification
Investing in mutual funds lets you achieve
a level of diversification that would otherwise be difficult
and expensive unless you have over $100,000 in your account.
Remember diversification is the financial term for "not putting
all of your eggs in one basket." Diversifying on your own
requires a lot of time, patience, and knowledge of the financial
markets.
Mutual funds allow you buy a large group
of securities (e.g., stocks and bonds) whose individual ups
and downs counterbalance each other, which has the effect
of lowering your overall risk. Without mutual funds, it would
be too expensive for most people to purchase all of these
different securities individually.
Keep in mind that some funds place their
focuses in specific areas. For example, precious metal funds
trade primarily in mining stocks. With these funds, when a
specific industry prospers, so do you. If not, you can lose
your money in the flash of a ticker quote.
Professional Management
Buying a portfolio of individual stocks
and bonds on your own can be tough since it takes large amounts
of financial sophistication and knowledge of the markets,
not to mention spare time (which you don't have). When you
invest in a mutual fund, you are hiring a large group of trained
professionals with vast financial resources to buy and sell
securities on your behalf.
Fund managers consistently monitor the performance
of your fund(s) and make adjustments to generate the strongest
possible performance. Mutual funds provide the chance for
you to retain professional management of your money at a reasonable
cost. Theoretically pros should make fewer investment errors
than you might yourself. And if they do make a mistake, they
should be able to catch and fix it faster.
Liquidity
Liquidity is the ability to quickly convert
a specific investment into cash with no excess costs. In other
words, with mutual funds you can quickly convert your investment
dollars into cash unlike other types of investments (e.g.,
real estate) which can take months to sell. Also, selling
mutual fund shares typically results in little to no penalties
for withdrawal as opposed to other investments (e.g., bonds,
CDs) which may charge you for pulling out your money before
your money matures.
Convenience
It is extremely easy and time-efficient
to invest in mutual funds. After you have set up a mutual
fund account, all of your transactions can be completed over
the phone or via the Internet. The purchasing of new shares,
reinvestment of dividends and withdrawals all can be set up
with minimal effort.
Choices
There are thousands and thousands of mutual
funds to choose from, each with different objectives and strategies.
With this variety, you should be able to find the funds that
suit your investment objectives and risk level.
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