Mutual funds are one of the most popular investment tools around today, especially among people who don't have the time and expertise to watch the ups and downs of markets when picking out individual stocks. Here are 3 reasons why mutual funds can be great investment vehicles.
One of the golden rules of investing is diversification: making sure you are investing smaller proportions into a wide range of assets. But this can be pretty difficult because that would mean having to track lots of different stocks at once, a task that requires a lot of time and experience. However, mutual funds hold anywhere from 50 to 200 securities, which can include stocks and bonds from hundreds of different industries, sectors, and regions. By not putting all of your eggs in one basket, you reduce the risk associated with having a single investment perform poorly, and you also take advantage of the convenience of having that diversification come in a single package.
Every mutual fund is overseen by one or more professional portfolio managers, who select the holdings in the fund, balance the portfolio, engage in investment research, and make sure that the fund is getting the best rate of return possible given its objectives and risk constraints. Rather than having the fund blindly follow a benchmark index, mutual funds let you take advantage of the expertise of a professional who actively pursues the best outcome for your investment.
For whatever reason, an investor might want to cash out their investment quickly, which can be unfortunate if the assets happen to have plummeted at that moment. But mutual funds have higher liquidity: they can be converted more into cash more easily. This is because the value of the investment tends to be less volatile because of how diversified mutual funds are. The funds can be sold easily, and with fee-based series funds, there are no back-end loads (no penalty charges) to discourage the selling of a mutual fund.
Whether mutual funds are a suitable investment for you depends on your financial situation, and mutual funds can differ significantly from one another. In fact, there are thousands of mutual funds out there that can make investment decision-making overwhelming.
It is important that the mutual fund chosen is suitable to your personal situation, including your budget, savings objectives, time horizons, and risk tolerances. It is your advisor's job to make sure they hand-pick funds that meet these criteria to make sure you are reaching your objectives as best as possible.