Mutual funds have been an increasingly popular option for investors recently, as more and more funds have become available offering lower fees and greater opportunities for diversifying you portfolio. While mutual funds have surged in popularity in the past few years, it does not mean that they are right for every situation and investment goal. As online trading and research has make it relatively simple for the average investor to research and invest in individual stocks, it is important to carefully weigh the advantages of mutual fundscompared to investing in stocks directly.
It is important to figure out your unique situation, available investment capital, and time frame for investing when considering investing in mutual funds. In some instances, such as investing through a 401k or other company sponsored retirement plan, the plan manager will select specified funds that you can invest in. This will still require you to do your homework on the funds offered as there may be factors that effects each funds individual performance.
When researching mutual funds, it is important to look at several factors including the fund’s past performance, the tenure of the funds manager, the objectives of the fund and any fees and commissions associated with investing in the mutual fund. Although past performance is not an indicator of future performance, it can give you an idea of how the fund performs in various economic climates, and could provide you with insight into the fund’s chances of realizing gains in the future.
You must also take a careful look at the length of time a manager has been with a fund, as will as the fund’s holdings and the manager’s investment style to figure out if the fund meets your individual risk tolerance and investment goals. It is important to keep in mind that even professional money managers can lose money in the stock market, so a professionally run fund is not a guarantee that you will make money.
Management fees can sometimes be lower
If you are trading with a fairly small account balance, the commissions charged by your stock broker are likely to take up quick a large slice of your account balance. The management fees are likely to be much lower.
Economies of scale comes into the equation here. Mutual fund managers can get much lower trading commissions than small individual investors due to the trading volume.
However, if you have a larger account balance this may not be the case. It is even possible that the management fees would be higher as the salary of the fund manager is included in the management fee..
Set and forget
One big advantage of investing in a mutual fund is that you can invest then leave it alone. It’s the fund managers job to watch the stocks he or she invests in and earn you good returns on your money. This enables you to invest with a minimal amount of maintenance.
Opportunity for above average returns
While it is true, there’s a lot of lousy fund managers out there that are not even able to keep up with the main index, there are some excellent managers out there who have earn good returns for their investors for decades.
As mutual funds usually invest a big pool of money, they are often able to diversify more than an individual investor with a smaller account size. This can often result in less risk and higher returns if you select a skilled manager.
When investing in mutual funds it is always important to be aware of the potential risks. Your investment can always go down as well as up and there is always a chance that there will be large fluctuations in the short term. It’s very important to choose a good fund manager with a proven track record, it’s certainly worth taking your time over this as there are many poor fund managers who do not perform well.
The good news is that if you invest in one or more good funds over the long term, there is a good chance you will see above average returns on your money.