Investing Mutual Funds
Why Should I Invest in Mutual Funds Instead of Stocks?
mutual fund investing
Investing in the stock market can be both very lucrative and risky. Then there are mutual funds. A mutual fund is basically a collection of stocks and/or bonds. If a mutual fund is made up of stocks, why not just buy stocks?
First of all, not all mutual funds are made up entirely of stocks. Some funds include bonds, real estate, currency, commodities, and other investments. That alone is one great reason to invest in mutual funds instead of stocks; you get instant diversification. Also, investing in stocks can have a lot of costly fees. If you opt for no-load mutual funds, you don’t have to pay any fees. Finally, mutual funds are easy investments. If you want to invest in stocks you have to research stocks by reading financial statements, reviewing history, and understanding what you are doing. With mutual funds, you can invest in a no-load fund that has no fees and get professional stock picks. If you’ve finally realized that you need to be investing your money, and you don’t know how to invest or what to invest in, start with mutual funds. Watch your money grow, and if you ever feel confident enough you can buy your own stock picks.
The draw to mutual funds is the professional management, diversification, affordability and liquidity of the funds. One of the various types of mutual funds are the money market funds. They are a lower risk mutual fund investment even compared to other types of investments. Bond Funds are a middle risk mutual fund investment. They pursue investment strategies that are meant to yield higher returns. A prepayment risk can be involved if the bond issuer decides to pay off the bonds early and possibly re-issue them at a lower interest rate, especially if the interest rates have fallen nationally.
Stock funds are the highest risk in mutual funds on average. There are four main types of stock funds: growth, income, index, and sector. Growth funds invest in stocks that may not yield a regular dividend but have the potential for good capital gains, income funds focus on stocks that pay regular dividends, index funds intend to get the same return as a particular market index by investing in all or a good number of stocks in that index, and sector funds are aimed at a particular stocks in an industry such as technology or entertainment.
Here are my Top 7 reasons to us mutual funds:
1. Selection. You can select from thousands of funds (you’ll find one to suit your needs) and you can get information on them easily.
2. You Can Start Small. Most mutual funds will let you start with less than $1000, and if you set it up for automatic deposits, some will let you start with only $50.
3. Simplicity. You deposit 10% of your income every month. Just pay yourself first, then pay the mortgage, then pay everyone else.
4. Professional management. I don’t always have time to research, select, and monitor individual stocks.
5. Compound interest. Depending on what index you pick, the U.S. stock market has gone up an average of over 12% per year for the past 10 years, and it’s been almost that high for the past 20 years.
6. Diversification. A broad-based growth fund typically invests in dozens of companies in different industries, sometimes even in different countries around the world. If one stock goes down, hopefully dozens of others will go up. There is excellent protection and sound risk management built-in to these funds.
7. Fund “Families”. Most mutual funds are offered by management companies that sponsor several different funds, with different objectives. They make it easy to move your money between funds, so as your goals change, you can adjust your investments with a quick phone call, or on the Internet.
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