Mutual funds have grown in popularity over the last few years to the point where it’s harder to find an investor who is not using mutual funds than one who is. The popularity of mutual funds is no surprise when you consider that they are one of the easiest investments to use and require very little knowledge of the financial markets. There are 4 main advantages that mutual funds offer every investor, as you will learn in this article.
The first advantage of mutual fund investing it that Mutual Funds offer professional management of your investment dollars. Mutual funds are run by fund managers, who are essentially watching over your investment daily. There is almost no other place where you get that kind of investment management without paying huge management fees.
The second advantage of mutual fund Investing is that mutual funds are extremely liquid. Any investor can sell his shares in a mutual fund any day that the Stock Market is open. Compare that to investing in real estate, CDs or even stocks that have low trading volume which can takes weeks to months to liquidate your stake. The liquidity of mutual funds gives any investor the ability to get out of the investment quickly if needed.
The third advantage of mutual funds is the diversification that they offer. Mutual funds invest in tens or even hundreds of different stocks, bonds or money markets. Trying to duplicate this type of diversification in your own portfolio would result in very high trading fees, not to mention huge headaches from tying to monitor hundreds of stock positions. This leads us into the fourth advantage of mutual funds, lower fees.
Mutual funds have very low fees due to their ability to take advantage of economies of scale. Since mutual funds are pooling the investment dollars of so many investors they can buy stocks in larger quantities which leads to lower fees for mutual funds investors. Numerous mutual funds have fees that are under 2 or 3%.
Mutual funds are growing at a feverish pace as more and more investors put their money in them. But considering the great advantages that mutual funds offer the average investor all the way up to guy with the multi-million dollar portfolio, it’s really no surprise.
Kurt Howard
http://www.articlesbase.com/finance-articles/4-advantages-of-mutual-fund-investing-92214.html
December 26th, 2009 at 3:18 pm
Advantages of investing in mutual funds vs. individual stocks?
I’ve recently started work in my first career type job and have more money now and am keen to start investing money long-term for later in life.
Right now within my portfolio I have my money divided amongst a few different mutual funds. But I was wondering one thing about this. The mutual funds are no-load but charge a managment fee of around 1.5-2.5% anually which is just calculated against the value of the shares of the fund.
Correct me if I am wrong on this – but these days you are able to buy and sell stocks for almost nothing online without the larger broker fees you would have had to in years past. So – with the mutual funds I am having to pay for its managment.
Would it not be better to say take a list of the major holdings in the mutual fund and just divide the same investment amongst shares in those companies? I still have diversified holdings but do not have to pay a percentage for a fund’s management? Or is there some other advantage I am missing?
Thank you
Well I guess that’s the idea, but I’ve also read that in the past, most actively managed mutual funds have not performed significantly better than more basic index funds. This is why I wonder if I ought to steer more towards those or a diversified base of corporate stocks themselves?
December 26th, 2009 at 8:20 pm
The fund’s managers are likely to be better pickers of stocks than you are. There are many good ways to do your own stock picking; there are lots of newsletters, or you could just buy the stocks in the DJIA. (There are mutual funds that do just that, if you don’t want to take the trouble to do it yourself.)
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December 26th, 2009 at 8:22 pm
Well when you are buying a fund, you might be buying into 100 companies.
If you wanted to buy shares in these 100 companies individually, it would cost you a fortune, because you have to buy 100 shares minimum typically. You can’t buy 1 share
Now also, online brokerage fees are not free. They are very pricey for a small trader.
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December 26th, 2009 at 8:24 pm
I have seen a very good and usefull dicussion forum on stock market- http://www.onlimoney.com where you can disuss stock market and commodities.
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December 26th, 2009 at 8:26 pm
The big advantage of mutual funds is professional management and diversification for reduction of risk. That said, 1.5%-2.5% E.R.s are higher than average costs for mutual funds. There are many excellent no-load funds available with E.R.s well under 1.0%. Check Vanguard or T. Rowe Price in particular.
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December 26th, 2009 at 8:28 pm
Don’t you know that 80% of mutual funds under perform the market? It’s only my opinion but those who invest in mutual funds are simply lazy speculators who can’t or don’t know how to do their own analysis.
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December 26th, 2009 at 8:30 pm
You CAN buy stocks 1 or 2 shares at a time, but even with small trade commisions, this is cost ineffective.
And there is nothing wrong with owning some individual stocks and some mutual fund(s) shares.
I believe it is true that most domestic stock mutual funds underperform a good index fund like for the S&P 500. But the key take-away point here is, DON’T buy the average mutual fund; DO buy the above average mutual fund.
If you spend the time and effort to search out and pick one of the relatively few superior funds, you will be richly rewarded. You might buy or borrow Jim Cramer’s new book where he picks several of the best mutual funds. You may not want to blindly go with his picks, but he probably has detailed reasons on why he has made these picks.
I would say that any expense ratio above 1.8% is very costly & I would expect fantastic returns or dump it within a year. I have one fund that costs 1.2% ER, but it does have unbelievably high returns. My others have ER’s between 0.2% and 0.7%.
One of the virtues of a great mutual fund is having the professional manager making the tough choices for you. The average investor WILL panic from time to time & do damage to their portfolio.
What might motivate you to add some individual stocks to your portfolio of mutual funds? I seek out high dividend, high div. growth, and at least moderately high earnings growth in a stock. Then automatically reinvest the divs. into more shares with a DRIP. If done within an IRA, the divs. don’t generate tax fees, and will be more cost effective than a high div. fund. Also, fund investors jumping in and out of the fund can damage your returns a little, even if you buy and hold.
When buying individual stocks you are exposed to the single event risk causing one of your stock picks to plummet. So I’d strongly recommend that you stick with stable, lower risk stocks.
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December 26th, 2009 at 8:32 pm
" long-term for later in life"…. I hope that means at least some of the portfolio is in IRA accounts. That’s number one.
Number two is : are you going to watch the portfolio every day…bad news comes fast sometimes…that’s why you pay the manager..to buy and sell daily, weekly, etc…looking for signs, triggers, momentum, etc.
Number three…if you think you can select individual stocks, you should be able to select funds that will consistently beat average index returns.
Don’t dump everything and think you’re going to be a " market beater"…Get into a couple of good funds returning double digit gains ( so you won’t sweat the 1.3% fee)…then take a portion of your portfolio, buy one or two things that you think are " sure winners"…and wait six months.
How’d you do? Do whatever seems right from then on.
Good luck.
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December 26th, 2009 at 8:34 pm
The correct answer is yes and no..
Advantages of funds
Theorectically, the managers have more resources available and can investigate many different stocks to make appropriate choices.
Secondly by buying in larger volumes they can save on commissions as percentage of cost. This can mean difference between profit and loss
By choosing the stocks that are shown in annual report you might be buying just as they are preparing to sell.
A stock can move several percentage points in a day. You might have made the right choice but your order might not be filled. A large block of shares might be easier to move between institutions.
Disadvantages of mutual funds
If your fund has done a number of trades in a year, you could end up paying taxes on gains you never saw.
The management fees might more than offset savings elsewhere
Some mutual funds are so big that they cannot buy as much of a stock or industry as they might wish.
Astute managers can move to other funds and leave a mediocre team behind
Answer perhaps ETF (exchange traded funds ) with low MER’s might work for you.
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