5 Reasons Why You Should Invest In Mutual Funds
From their inception mutual funds have been the investment tool of choice for those wanting a simple way to invest in the stock market. Because mutual funds are easy to navigate, you don’t have to be an expert to have a successful fund portfolio. Mutual funds were created so the average investor could invest in the stock market without hassle and without needing a broker’s degree. There are numerous benefits to this type of investment. In the following article we’ll take a closer look at the top five benefits of investing in mutual funds.
Regardless of the size of your investments you don’t want to put all your money into one stock. This is the most important rule of investing. With mutual funds you’ve got it covered. Mixing your investments within your portfolio is called asset diversification and it’s a way to manage risk by spreading your money across various industries and geographic regions.
If you were to buy stock in one company and that company did poorly, your investment would suffer. On the other hand, if you were to spread your investments out among several companies and one did poorly, only that portion of your portfolio would be affected. However, it takes a lot of money to directly purchase stock in several companies. With a mutual fund your assets are pooled with those of hundreds of other investors. Together you can purchase stock in numerous companies, thereby maintaining a diversified portfolio without a large upfront investment.
- Professional Management
When purchasing a mutual fund you are also hiring a professional money manager to invest your assets for you. This investment professional will buy and sell stocks for you to help you reach your goals.
Having an investment manager takes the burden off of your shoulders. You don’t have to be an expert in the stock market to have successful investments. Your manager will also be supported by the expertise of a large team of professionals who study the stock market and are able to combine their knowledge to benefit you. Your investment professional can help you find the best low risk mutual funds to round out your portfolio.
- Economies of Scale
To understand economies of scale start by considering volume discounts. In most retail outlets the more of a product you purchase the cheaper that product becomes. For example, if you were to buy a dozen cookies, the price per cookie would most likely be cheaper than buying an individual cookie. The same idea applies to investments. If you purchase just one stock at a time you’ll be paying a higher amount in transaction fees.
Mutual funds are based on the collective purchasing power of hundreds of people. Fund companies are able to use this size to their members’ advantage by reducing transaction costs. You can diversify your assets through a mutual fund without needing to pay numerous commission charges. You’re actually able to invest more of your money with mutual funds because you won’t be required to pay fees and commissions on individual stocks. This allows you to modify your investments for much less money.
If you’re like many small investors you don’t have ample amounts of money to invest in large corporations. Mutual funds typically purchase stocks in large volumes. This allows fund holders to benefit from reduced trading costs. Rather than waiting until you have saved enough money to purchase an expensive stock, you can immediately begin investing small amounts through mutual funds.
Another advantage of investing in mutual funds is the ability to redeem all or part of your investments with ease. Typically mutual fund investors can sell their funds in a short amount of time with little difference between the sale price and the current market value. Before you sell it’s always a good idea to ask about processing fees. Mutual funds are considered to be more liquid than many other types of investments such as deposits, bonds and shares. The liquidation process is also standardized so you’ll have your cash in hand quickly and efficiently.
The Bottom Line
There are risks associated with any type of investment including mutual funds. They can be affected by market fluctuations and may even produce returns below the overall market. Mutual funds are not free; almost all require fees and penalties for early withdrawal. However, even bearing in mind all of these factors, there are many benefits of investing in mutual funds. They are an excellent financial tool for small investors. Investing in mutual funds will provide you with a diversified portfolio managed by a professional who has the expertise to help you reach your financial goals.
Damian Wolf is a freelance writer who received a master of business degree from the University of Queensland. He has more than 15 years of business and finance experience and volunteers at schools teaching students financial literacy. He and his wife have one child and live in San Francisco, California.