Investors enjoy selecting individual investments and monitoring their progress on a regular basis. This can be rewarding and fun if you have the time, experience and patience to research your investments and monitor their progress.
Like many people, you may already have a busy schedule or are uncomfortable with selecting your investments. Many people in this position sometimes choose to invest in mutual funds, which are investment vehicles that pool your money along with other investors into a portfolio of individual securities such as stocks and bonds. The portfolio is created and managed by investment professionals whose full-time job is to make investment decisions that benefit shareholders such as you. If you purchase mutual fund shares, you essentially own a piece of that portfolio and can potentially benefit in several ways. First, the securities in the portfolio may pay dividends or interest income, which will in turn be passed along to you in the form of fund distributions. Second, the portfolio managers may sell securities that have appreciated in value and pass the gains along to you. And third, if the value of your mutual fund shares happen to rise, you can potentially sell them for more than you paid. Keep in mind, however, that mutual fund investments fluctuate in value and your mutual fund shares may be worth more or less than their original costs when redeemed.
There are many reasons why people select mutual funds in their own portfolios. Here are some common reasons:
* Diversification. To guard against market volatility risk, many people opt for a diversified approach. Investing in a mix of securities, or diversification, may help reduce risks if one security declines in value, others may increase in value and potentially help compensate for a loss in value. Fund managers facilitate this process by often investing in a wide variety of securities. Please note that diversification doesn’t guarantee against market loss in a declining market.
* Benefits and Costs. As an investor in a mutual fund you may be able to take advantage of a variety of services such as live customer service, online customer service, automated reports and systematic investment plans, to name a few. Fees and costs associated with mutual funds can vary greatly from fund to fund, and can be an important criterion in investing in a particular mutual fund. But many investors find they are still lower than the costs of buying individual securities.
* Liquidity and Choice. Mutual funds vary in composition and investment objective. Whether you wish to invest in high technology companies or municipal bonds, there is probably a fund suited to your investment objective. These funds can generally be bought or sold on any business day – which can make it easy to alter a portfolio as investors’ objectives change over time.
Before investing, it is important to carefully consider what your desired goals are and when you expect to achieve them. The time horizon you have to work with is key to picking the right mutual fund.
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