A mutual fund is a company that buys securities, which are stocks, bonds, money markets, etc. The company employs professional fund advisers that spend their days buying and selling the securities that will make them and their clients money. When an investor buys a share of a mutual fund, they are buying a share of that company.
Mutual Funds Make Investing Convenient
Every business show, investment section of a paper, investment articles online and in magazines explain that diversification is key to investing. Mutual funds make diversification automatic. Diversification is the dispersal of an investor's portfolio funds across different securities, industries, and growth objectives. Diversifying reduces the volatility of an investor's portfolio, and if one company tanks, the investor's other shares in other companies will help keep the portfolio more stable than if the investor had all or most of their money in the failed company, especially if the other companies are doing well.
Mutual Fund Fees
While mutual funds do have fees, they are less than what one would pay for if they were to buy and sell individual stocks. An investor has the option of choosing a mutual fund with a front-end-load fee, which is a fee that is charged upfront and taken from the money being invested. Front-end-load fees run between 2.5%-8%.
According to Thomas Garman, professor emeritus for the University of Kentucky, and co-author of Personal Finance, ninth edition, a short term investor should seek a low cost front-end-load mutual fund and only long term investors should enter into front-end-load funds. There are also some mutual funds that charge a back-end-load fee, which in the long run is more expensive than a front-end-load and is not recommended. Mutual funds are also cheaper to invest in than common stocks because the amount of trading that the funds do.
Mutual Funds are Managed by Professional Advisers
Managing a portfolio and keeping it diversified is a full time job, and this is a major benefit of mutual funds. A fund advisers only goal is to make money for themselves and their clients. Fund advisers not only have the knowledge of buying and selling stocks, they have the time and resources. They have the most recent numbers, figures, and charts that help them make the best decisions. They also know how to read and interpret all of the complex information, and do it quickly, which is something that a normal person with a 9-5 job does not have ability to do.
All Investors Benefit from Mutual Funds
New investors that want to get into the market, but have limited knowledge of it should go with mutual funds. If they want to invest in common stocks once they know more about the market, then that is always an option. It is safest to dive into a fund, and not common stocks. They are easy to open, and easy to deposit and withdraw from, which also makes it easy to dollar cost average. Mutual funds are also perfect for the passive investor that does know about the market, but would prefer reap the automatic benefits of having their portfolio be diversified, paying low fees, and having the convenience of having someone else manage their money for them. All investors can benefit from mutual funds.
For more information on mutual funds, seek the advice of a professional financial planner. Fee based financial planners are preferable because they offer unbiased advice.
Carmen Sofia Grant - Carmen is a social media marketer, freelance writer, and blogger. Her favorite blogs are MomCrunch and Social Media Examiner.com
