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Mutual Fund Basics
Mutual Funds: More Bang for Your Buck
by Terry Nager (Write for us!)
(Click on the links within the article to get definition of that word)
Each mutual fund has its own internal fees, typically around 1%. An investment advisor can assist the investor in designing a balanced portfolio of such funds that is tailored to his or her risk tolerance. Even if that advisor charges fees up to 1% of investment assets, mutual funds are still a very cost-effective investment. The advisor is typically able to acquire funds that the individual investor cannot get, such as the institutional share classes that
have lower internal costs but normally require large initial investments. Here are five major advantages of investing in mutual funds: Diversification
As implied above, each equity mutual fund invests in many different stocks. Thus if one of those companies whose stock was held by the fund were to go out of business, the effect on the fund's overall value would be marginal. This is as opposed to an individual investor in that one stock who would lose his or her entire investment in that stock (think Enron!). An investment advisor can bring a second level of diversification by blending mutual funds with different objectives within a portfolio. While it is true that a few mutual fund families have been tainted by scandal, the net effect to the individual investor has been small, and mutual funds are one of the most regulated investments within the financial servicesindustry.
Low Expense
Of the several thousand funds in the universe of mutual funds, about half are classified as "no-load." This means there is no front or back-endcharge to purchase such funds. Investment advisors can acquire most load funds at no-load, thus increasing the selection for investors.
Professional Management
When a famous bank robber was asked why he robbed banks, he responded, "That's where the money is!" For the same reason, this is why the best money managers in the world become
mutual fund managers. Why should they stay as individual investment advisors managing tens of millions of dollars, when they can manage a fund with hundreds of millions or even billions under management? These managers have full-time staffs devoted to analyzing what are the best investments for the fund. An investment advisor can help the investor select the best of these managers using a number of objectivecriteria.
Liquidity
By nature mutual funds are very liquid investments, meaning they can be converted into a money market fund usually within 24 hours.
Access to All Markets
Depending on the objective of the fund(s) chosen, the individual investor can literally be an international investor, with access to markets around the world for a modest investment outlay.
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