Benefits of Investing in Mutual Funds
Mutual funds are top-rated and have been for many years, but what exactly are mutual funds, and how does an investor begin investing in mutual funds? Mutual funds are collections of stocks and/or bonds that are managed by a fund manager, that sells shares of the fund to investors. Shares in the mutual fund do not have any direct correlation to shares of stock included in the mutual fund. They are called mutual funds since many individuals can purchase shares in the same fund.
The stocks and bonds inside a mutual fund will earn money via dividend and interest payments or through the sale of securities within the fund. In both cases, the mutual fund investor will receive a distribution from the fund. The mutual fund can also increase in value from stocks held within the fund, increasing in value without being sold. In this case, the mutual fund has a higher cost, but the investor doesn’t receive a distribution.
Mutual funds are not for every investor, to decide if mutual fund belongs in your portfolio; it’s better to look at the pros and cons of mutual funds and weigh them alongside your investing goals.
Pros of Mutual Funds
It’s effortless to buy and sell mutual funds. This makes mutual funds attractive to new or less savvy investors.
By their very nature, mutual funds are automatically diversified. This makes it easy for new and less savvy investors to maintain a diversified portfolio.
A professional fund manager handles the trading of the stocks and bonds contained in the mutual fund, thus freeing the investor from constantly monitoring each security held in the fund.
Cheaper Transaction Costs
Because of the volume of trades executed at one time, the per transaction cost is much less expensive than if each transaction were completed individually.
Cons of Mutual Funds
A pro can also be a con. The fund manager is looking out for the health of the fund as a whole to, hopefully, maintain consistent performance. They don’t always have the highest ROI in mind, or the fund could have a mediocre (or even bad) manager.
Mutual funds are still hit with capital gains taxed whenever a fund manager sells security held in the fund. This can have impacts on the investors in the mutual fund.
Anytime the responsibility shift to a third party, there will be additional costs involved. An investor buying into mutual funds may spend much more on their upkeep than an investor executing their trades.
Too Much Diversification
Diversification is good, but too much is terrible. A portfolio that is too diversified will have sluggish performance as opposed to one that is optimized between risk and growth. Most mutual funds take a more conservative approach to risk than an optimal portfolio would.