A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. It is a collection of stocks and/or bonds controlled by a mutual fund manager. The manager is sometimes called the “trigger man” because he triggers the sale and purchase of the stocks and bonds.
On the whole, the average mutual fund returns are comparatively less per year than stocks. Managed mutual fund shareholders as a group can expect to see any return reduced by the approximate costs imposed by the funds.
What are the Advantages of Mutual Funds
Buying a mutual fund provides instant holdings of several different companies and thus diversifies one’s portfolio. Investors don’t put all their eggs in one basket, so to say.
Mutual funds are also quite liquid. A mutual fund investment can be converted into cash upon your request.
What are the Disadvantages of Mutual Funds?
Mutual fund investors have no control over what to invest in. Unlike picking your own individual stocks, a mutual fund puts you at the mercy of the manager.
Mutual funds generally have only small holdings of so many different stocks. When a fund’s top holdings jump to high numbers, this doesn’t make much of a difference in a mutual fund’s total performance. There is really just small gain realized from even top the top performing stocks. This is caused by overdiversification.
Funds will typically have a range of different fees that reduce the overall payout. Often, these fees are not well explained to investors.
So should you invest in Mutual Funds?
I’d personally recommend that you try it out. Just make sure to understand all the costs involved. The investment required is pretty small yet can still gain some significant passive income. Mutual fund investments are even, at times, better than putting your money in a Bank Savings Account. When you are ready to try out managing your own stock portfolio, just cash your mutual fund for investment capital.