What Are The Advantages Of Investing In Mutual Funds?
Mutual funds provide a lot of advantages to individual investors that are not readily available in other types of investments. Dollar cost averaging, diversification and professional management are all aspects of mutual funds which helps separate them from other investments.
A common scenario which many individuals or households experience is the desire to start planning for the future financially by investing but they just aren't sure how to go about getting started. A recent graduate from college has just started their first job may not have the time to do the research to make financial decisions which is where a mutual fund can help. A family with two small children may want to start investing for education or retirement but may not have the financial resources to purchase large blocks of stocks or bonds and may not be willing to risk the family's financial security. What happens is $10,000 falls into your lap? Where are you going to invest a large sum of money and are you comfortable in making such a large financial decision?
Mutual funds are a great investment for a number of individuals and families because they help take the worry out of making the "wrong" financial decision and possibly harming your financial future. Professional portfolio management by licensed and experienced investment advisers, dollar cost averaging and diversification are a number of advantages of investing in mutual funds.
All mutual funds have one or more portfolio managers which analyze financial data, statistical information and trend analysis to get a big picture view of potential investments which can help minimize possible losses in principle. An experienced mutual fund manager with a long track record of successful performance can help reassure a potential investors of future growth. While it is often said that past experience is not indicative of future performance it is still a good place to start when picking a mutual fund.
However, even if a good mutual fund manager can make a bad purchase in a particular stock and diversification can help minimize overall losses in the mutual fund. When a mutual fund is formed it outlines its investment goals and states how it will achieve those goals. If a mutual fund states in its prospectus that it will invest in between 200 and 300 companies then it is stating its level of diversification. So even if one or two of the companies goes bankrupt, other companies being held by the mutual fund will hopefully increase in value to offset the loss.
A family of four looking to plan for the future or recent college graduate can also benefit from mutual funds by utilizing dollar cost averaging. This allows for those on a fixed income with limited financial resources to purchase shares in a mutual fund for a set amount every month. Instead of purchasing 100 shares of a stock that you pray goes up and doesn't go bankrupt you could purchase $50.00 worth of mutual fund shares regardless of per share price which will average out the cost basis over time. So even if shares in the mutual fund decrease more shares will be purchased that month so hopefully when it goes back up overall portfolio performance will be better in the long term.
Investing often requires a lot of research and due diligence and can have significant risk of capital loss. Mutual funds can help minimize a lot of the risk by spreading out large amounts of money across multiple companies. Financial decisions are also being made by qualified portfolio managers with years of experience and industry insight which may lead to smarter investment purchases and higher returns. All investments have the potential of loss but mutual funds offer many advantages which are not available with direct purchases of stocks, bonds, precious metals and futures. For those looking to invest, mutual funds can be a great way to get started on the road to financial security.
