Mutual funds have often seemed like one suitable alternative investment, particularly in times of uncertainty in the stock markets for the most because a small amount of money can be greatly diversified. Mutual funds pool money from many sources and invest it in a collection of individual securities of different asset classes such as stocks, bonds and other publicly traded securities. Each owner of the individual securities owns a percentage of the investment company’s total portfolio.
The increasing popularity of the mutual funds is due to their attractive features that offer investors the opportunity to manage their day-to-day investment affairs and receive services that were previously offered solely to large institutional investors.
The major advantages of investing in mutual funds include:
Diversification: A single mutual fund can include securities from several (hundreds or thousands) of issuers and money invested in the fund is automatically diversified across all the fund’s investments. By investing in hundreds of companies with positive prospects and returns, even if some fail, the others will inevitably make up for them. Thus, a small investor acquires ownership in a diversified portfolio for a small amount of money and reduces significantly the risk of high monetary losses.
Liquidity: Investors can buy and sell shares directly from the mutual fund any business day that the market is open. Such trades are priced at the NAV at the closing of trading on the day the order arrives at the fund. Thus, investors have easy and prompt access to their money.
Professional management: Average investors lack the education, skills and resources to look for diverse investment opportunities in the chaos of the thousands securities available in the financial markets or the time to manage their investments. Fund managers have access on economic research and company trends and are experienced in selecting the right securities to invest money.
Flexibility: Mutual funds offer a wide variety of funds to meet the investment objectives of diverse individuals. In majority, mutual fund companies manage growth funds, money-market funds, index funds and so on and allow investors to switch from one fund to another at no cost or at very low cost. This enables investors to keep their portfolio balanced any time, even when their own financial goals or market conditions change.
Indexing: Investors, who believe that markets are efficient enough to allow reasonable returns, can select mutual fund investments in index funds, which are especially designed and managed to track a particular index. For instance, S&P 500 is a stock index that tracks changes in the value of a hypothetical portfolio of stocks.
Affordability: Investors can acquire units of shares in a relatively small amount of money such as $500 for the initial purchase. Some mutual funds are constructed in a way that allows investors to buy units of shares on a monthly basis with an installment of $50. In that way, the portfolio risk is allocated throughout the year and investors are able to follow all the market ups and downs and buying shares in lower and higher prices. All the shares bought in their portfolio will be cashed out at a market high to achieve the best possible portfolio return.
Overall, mutual funds achieve the highest possible capital gains by taking advantage of investment opportunities in global capital markets. Fund managers provide a comprehensive range of investment solutions and appeal to many investors with different risk-return preferences.