Mutual Funds
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Mutual Funds
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Mutual Funds Offer Diversification By Jaclyn Kruger
Mutual funds, also known as open-end investment companies, offer the investment novice a way to enter into the market. Mutual funds are typically the first way that individuals begin investing money. Many 401(k) programs place money into mutual funds for retirement. If chosen wisely, mutual funds can be a relatively low-risk investment, due to their diversification. The golden rule of investing is diversification. There are three main advantages to owning mutual funds. First, there is professional management. Most mutual funds have a professional portfolio manager. His/her job is to watch over the securities, establish which securities to purchase, and determine when to buy and sell these securities. Although there is a portfolio manager to monitor the fund, it is the responsibility of the investor to choose a mutual fund that will help the investor achieve his/her goals. Secondly, mutual funds offer investors smaller minimum investments. Because a mutual fund is a compilation of multiple securities, it would be quite expensive to purchase all the securities individually. With a mutual fund, an investor can spend a fraction of the price and purchase a small part of the total fund. All in all, this enables small investors to invest in large portfolios that they could not purchase individually on their own. Lastly, and possibly the most important, mutual funds offer diversification. Diversification reduces the investor’s risk without forfeiting too much of the expected return. If one security in a mutual fund decreases in value, then the theory is that the other securities in the fund will compensate for that loss by increasing in value. As a result, there may end up being a zero percent change because some securities increased in value and some securities decreased in value. As noted by the advantages above, mutual funds offer the first-time investor an easy way to enter into the market. Mutual funds are a simple way to begin investing and learning about the market and how it works. Don’t be afraid of the market, just simply invest small at the beginning and take your time. Because of the time value of money (which will be explained in future articles), mutual funds offer a great return for their risk.
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