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Mutual Funds Better Than Indvidual Stocks ?
By: John Foley
Though it cannot be said in general that mutual funds are always better than
individual stocks, it still cannot be denied that they usually involve lower
risks, less money and generally yield lower but safe returns.
It all depends on the risk attitude of the investor. This is understood clearly
by looking at the disclaimer attached with any mutual fund options that are
nearly identical with that applicable to any other (kind of) stock. They have
their advantages and loopholes like any other form of investment. And as in
other forms of investment, one has to be fully aware of potential pitfalls and
while driving high with mutual funds, has to be alert enough to avoid them.
Mutual funds are seemingly the easiest and least stressful way to invest in the
stock market. Quite a large amount of new money has been put into mutual funds
during the past few years.
Briefly put, a mutual fund is a pool of money contributed to by individual
investors, companies, and other organizations. There will be a fund manager
hired to invest this cash with a primary goal that depends upon the type of
fund. The manger usually diversifies in a manner such that the net average
earning is expected to be considerably positive. S/he may be a fixed-income fund
manager. In that case s/he would work hard to provide the highest return at the
lowest risk. On the other hand a long-term growth manager should try at least to
beat the Dow Jones Industrial Average or the S&P 500 in a given fiscal year.
But that is what any successful investor attempts to do, and anyone with a
similar approach can be expected to make the same earnings.
It all depends really on the overall investment climate and the sectors in which
funds are flowing in. Diversification is definitely a good approach when it
comes to successful investing by a reasonable investor. But with mutual funds,
there is that the controllers may over-diversify.
Diversification minimizes the inherent risks of stock trading by spreading out
the capital over many stocks. But over-diversification is again a bad thing.
First, an investor gets into many funds that have significant mutual
implications, thereby losing out on the full benefits of risk stretching that
diversification affords.
Secondly, over-diversification may decrease your overall return. By hitting too
many poor through mediocre funds, the investor reduces the return by missing the
potential of a few well-managed funds.
It is true that mutual funds play it safe. This is because mutual funds are
actively organized by a professional money manager who keeps constant checks on
the stocks and bonds in the fund's portfolio. As this is her/his primary
occupation, s/he can devote much more time to choosing investments than an
individual investor. This provides the investor with the peace of mind that
comes with informed investing without the stress of analyzing financial
statements or calculating financial ratios.
But on the negative side, a mutual fund, unless open-ended, must remain confined
within a fixed portfolio. Even with open ended mutual funds, the range of
potential is often low as compared to what is available to an investor free to
choose any stock s/he likes.
Besides, mutual funds some times come as load funds in which the investor has to
pay the sales commission on top of the net asset value of the fund's shares.
Also, the dollar-cost averaging strategy is just the same with mutual funds as
to any common stock.
Of course, fixing such a plan can substantially reduce your long-term market
risk and result in a higher net worth over a period of ten years or more.
Hence considering the stress, agony and risk that any stock may involve, mutual
funds look a shade better than independent trading, if low but steady is ok for
you.
About the Author:
Article Written By J. Foley http://investments--trading.blogspot.com |
