Mutual funds are nothing more than a group of stocks and/or bonds. Mutual fund companies, also known as investment companies, obtain funds from many investors by selling shares. The funds are then managed by financial professionals who purchase investment securities to benefit the shareholders.
The power of many investors allows middle income investors, or those with smaller amounts of money to invest, the ability to spread out some of the risk (financial diversification). Also, individuals with small amounts of money to invest are normally not afforded the luxury of professional management; combined investments in mutual funds allow for professional money management.
Who Should Buy Shares in a Mutual Fund?
As implied above, mutual funds are ideal for allowing investors with small amounts of money to get into the investment game. Entry level investors and investors with less than $50,000 in investments should consider mutual funds to advance their personal financial situation. Also, if someone is an individual who knows that they need to invest money in order to secure their future, but does not have the time or the inclination to choose and manage which stocks and/or bonds in which to invest; mutual funds may be the perfect choice. For many consumers, buying mutual funds is synonymous with investing.
What are some of the Disadvantages of Mutual Funds?
OK, so, this one is going to seem conflicting, but here it goes. As stated earlier, one of the features of a mutual fund is the professional management received when investing. However, it has long been debated whether or not these financial professionals are any better at choosing stocks than the average person who has taken the time to educate themselves.
Also, mutual funds are notorious for masking high costs with industry jargon, and investors can find themselves in a situation where there an overload of diversification to the point of dilution. When dilution occurs, high returns on a few investments do not make a huge difference on the overall return. Then, there are the taxes involved. Fund managers do not take a personal tax situation into consideration, so crucial events such as capital gains tax triggers are completely ignored.
The Final Word on Mutual Funds
Many people consider personal financial planning to be a luxury for wealthy individuals; however, having a personal financial plan would be more helpful for people with low and middle incomes than for people who already have wealth.
There is a degree of risk involved in any type of investment situation, but mutual funds are often worth the risk. Mutual funds are an excellent way for people with small savings (low and middle income individuals) to invest in their future.
- Sources -
Personal Finance, 8th Edition by Kapoor, Dlabay, Hughes
investopedia.com
Rachelle Williams - Rachelle Williams has been writing on the web for 2 years. In addition to Suite101, Rachelle Williams is a contributing writer for Demand ...
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