Mutual funds have been in existence since 1924, but some people are still skeptical about them. Many of them see mutual funds as a waste of time and money, choosing to keep their money in savings accounts instead. What’s the reality?
Mutual funds are not a waste of time and money since they enable you to invest, manage your risk, and help manage your investment portfolio. While they charge fees, mutual funds also offer convenience, diversification, and reasonable returns, thereby helping investors reach their financial targets.
In this article, I will cover a variety of topics that will demonstrate for you how mutual funds are not a waste of time and money. Additionally, we will also review some key advantages and disadvantages of investing through mutual funds. Let’s begin!
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
How Do Mutual Funds Save You Time and Money?
Mutual funds are a type of financial investment that allows you to create wealth without actively engaging in the nitty-gritty of portfolio management. The funds pool money from different investors then invest the same in equities, bonds, and short-term debt.
But like with any other investment, there’s some risk that comes with investing in mutual funds. These funds invest mainly in equities alongside other investments like bonds and the money market. However, stocks can be volatile, and the same goes for their returns. So how do mutual funds save you both time and money?
Mutual Funds Are Managed By Highly Skilled Professionals
Mutual funds employ highly skilled fund managers to run their funds. These experienced professionals possess the skills to pick winning stocks. They also have the backing of a dedicated research team that analyzes the market performance of the companies the fund invests in. It’s also the work of this talented team to analyze specific stock opportunities.
These experts do the work of choosing the right stocks for you as well as tracking their performance. So, you don’t need to dedicate any time to conduct research or time the market.
Mutual Funds Diversify Their Investments
Mutual funds diversify their stock portfolio to absorb market shocks. As a result, your money stays safe. This means that if you pick a well-diversified mutual fund that consistently performs well, it will manage your money well. The fund will also provide you with good returns in the long term.
Investing in a mutual fund thus allows an investor of smaller means to diversify their holding – a feat that would be a challenge to achieve through direct stock investments.
Mutual Funds Make It Possible for You To Generate Wealth
These funds provide a simple yet effective way to generate wealth by making regular investments through dollar-cost averaging. Online payment platforms also make it easy to fund your account. With regular investments, your wealth gradually increases, and you generate consistent returns.
Mutual Funds Provide Convenience
Mutual funds are quite convenient to invest in. You take a back seat and let the fund managers do all the work involved in research, stock selection, tracking, and overall portfolio management. You also don’t have to worry about when to exit and what criteria to base this on. The fund will take care of all that for you.
Before you invest in a mutual fund, you need to assess your risk tolerance and be clear on your investment objectives. One way to do this is to understand the pros and cons of investing in a mutual fund.
Pros of Mutual Funds
Below are some advantages of mutual funds:
Mutual Funds Are Low-Risk Investments
Investing directly in the stock market carries a high level of risk, but not if you do so through a mutual fund. The thing is, a mutual fund allows you to diversify your investments by purchasing stocks across different sectors, thus bringing down the potential risks significantly. This is because a slump in one industry does not affect the fund’s performance that much.
Moreover, the fund manager keeps track of the investment on your behalf. Plus, investing for the long term helps lower your risk while increasing your potential to create wealth.
The other thing is that the funds boast regulation. Mutual funds must register with relevant governing authorities and adhere to strict rules meant to protect investors’ interests. This protects your funds.
Mutual Funds Are Straightforward
Mutual funds are easy to invest in. While choosing the right mutual fund might take a bit of time and effort, once you have made your pick, the rest is easy. Besides, you do not require any financial knowledge or experience since the fund manager will manage your portfolio, as explained earlier.
Mutual Funds Are Not Expensive
You don’t need a lot of money to open a mutual fund account. Also, the funds do not charge high fees, particularly if you choose a no-load mutual fund or one with a low expense ratio.
The good thing is that investing in a mutual fund enables you to invest in shares from multiple companies.
This means that you can diversify your stock portfolio with a relatively small amount and meaningfully engage in the stock market.
Mutual Funds Provide Liquidity
Unlike stocks that require time to sell off, you can choose to exit from a mutual fund at any time. You can also make a partial withdrawal from the fund and receive your money within a relatively short time. This feature makes mutual funds ideal for emergency funds since you can access your money pretty fast.
Mutual Funds Earn You Good Returns
If you invest regularly and for the long term, you can earn consistent returns from your mutual fund. What’s more, you also earn from stock dividends, interest on bonds, or capital gains if the prices of the securities in your portfolio go up.
Downsides of Investing in Mutual Funds
Let’s have a look at some of the cons of investing in mutual funds:
- High fees. Fees typically reduce overall returns from your investment returns. Therefore, when selecting a mutual fund, be keen to check on the applicable management fees, sales charges, and expense ratios.
- Poorly executed trades. Mutual funds offer a weak execution strategy for investors interested in quicker execution times owing to shorter investment horizons or a desire to time the market.
- Potential for malpractice by the management. Some fund managers could engage in unethical business practices such as unnecessary trading, excessive replacement, and fixing the books.
- Lack of ownership: Unlike stocks where investing gives you direct ownership of the shares bought, this is not so with a mutual fund. Here, you can’t claim ownership of the individual stocks.
Can I Lose Money Invested in a Mutual Fund?
Though highly unlikely, it’s possible to lose all the money invested in a mutual fund if the securities held by your mutual fund lose their value. Drawdowns are common, but it’s rare to see a mutual fund from a regulated company fall to zero, losing all client money with it.
How To Invest in a Mutual Fund?
To invest in a mutual fund, conduct some due diligence, then select your ideal fund. Ensure to check on a potential fund’s investment profile, past performance, fees, investment objectives, and the management team’s level of expertise.
Once you open an account, you can then buy shares directly from the fund or through the fund’s broker. To fund your account, you can choose to use automated payments. Most funds also have real-time notifications that help you stay on track with your investment.
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Conclusion
Mutual funds have the potential to earn you a good return if you invest with a long-term horizon. So, if you are a moderate risk taker and are uncomfortable investing directly in the stock market, mutual funds are an ideal investment option for you.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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