A mutual fund is a collection of stocks, bonds, or other investment assets. You own the share of the mutual fund, not the share of the stock itself. The price of each mutual fund share is called its NAV, or net asset value. That’s the total value of all the securities it owns divided by the number of the mutual fund’s shares. Mutual fund shares are traded constantly. but their prices only adjust at the end of the business day.
What are the Advantages of Mutual Funds?
They tend to be less risky than buying individual securities because they are a diversified investment. That means you aren’t as dependent on an individual stock and its underlying company. If one of the companies, you own many more stocks to protect your investment
Furthermore, without a huge sum of capital or a professional management team, leveraging the expertise of mutual fund company is an advisable method to kick start your investment.
Mutual funds automatically give you the benefit of professional stock picking and portfolio management. You don’t have to research thousands of companies. The managers are experts in each field. It would be nearly impossible for you to become an expert in all the fields in which you’d like to invest.
Mutual fund’s big money comes through compounding interest. The more time you have, the better your investment become. The more time that goes by, the more powerful compounding becomes with the compliment or super low risk. You could definitely make your million owning mutual funds.
What are the Disadvantages of Mutual Funds?
It takes a great deal of time to research mutual funds. To make it worse, the managers of funds change. When that happens, it could affect the performance of your fund even if the sector is doing well. That’s really important, because managers constantly change the stocks they own.
Even if you look carefully at the prospectus, it might not reflect current stock ownership.
You really don’t know what you are buying specifically, so you are totally relying on the consultant that approach you.
The mutual fund prospectus will warn that past performance is no guarantee of future returns. But past performance is all you have to go on. There’s a good chance that a fund that’s outperformed the market in the past underperform in the future. That’s especially true if the manager changes.
Mutual funds charges management fees. That guarantees they will cost more than the underlying stocks due to professional management of your portfolio.
Types of Mutual Funds
If you can think of an investment type, there is a fund to cover it. For example, although most funds consist of stocks or bonds, you can find a commodities fund that buys the stocks of companies that profit when oil prices rise.
Stock funds focus on types of companies. Here are some popular categories.
- Small, mid or large cap companies.
- Value vs growth
- Domestic, international, emerging market or frontier markets
- Industries
- Blue chip vs high tech
- Dividend producers vs companies that reinvest all profits.
Fixed-income funds also specialize. Money market funds focus on CDs and short-term Treasury bills. Bond funds focus on types of bonds, such as high-yield, blue-chip or government bonds. A third differentiation is short-term, medium-term and long-term bonds.
Related: 6 Questions You Need To Ask Before Investing In A Mutual Fund
Conclusion
Mutual funds are superb tools that have created millionaires using our Money Tree strategy and other techniques. The tool itself has middle standing without bias. However, some might be at the losing side but with strategy you can always win the game. Majority is because they do not know how to construct a portfolio. Do not have the knowledge of lowering the risk at the same time maximize the portfolio return. Try to seek our portfolio consultant’s advice in order to achieve your financial goals.
