Ten Advantages of Mutual Fund Investing
1. You get full-time, professional money management. Most people do not have the time or skill to select and monitor individual stocks and bonds.
2. You get reduced risk through diversification because a mutual fund owns many stocks or bonds. You can also pick your level of market risk by choosing particular types of funds (e.g., money market funds to insure your principal will not drop in value, bond funds if you want current income and some stability in your portfolio, stock funds if you want your money to grow over the long term.)
3. You will earn competitive returns on your investment. Mutual funds can furnish the kinds of returns you need to reach your goals. In fact, by choosing an index fund, (a fund that invests in securities of one of the broadly based market indexes such as Standard and Poor’s 500), you can expect to match the market’s performance, minus the expenses of running the fund. This is an assurance that no other investment can provide.
4. You don’t need a lot of money to get started. Many funds require only $1,000 to open an account, and some funds require minimum initial investments as low as $250 to $500. Subsequent deposits can be as small as $25 to $100 if an automatic investment plan (AIP) is adopted. An AIP is an arrangement where you agree to have money automatically withdrawn from your bank account on a regular basis, (e.g., once a month or every quarter) and used to purchase fund shares.
5. You retain ready access to your money. A mutual fund is required to buy back your shares, which makes withdrawals easy. It will mail your check within seven days of the request at the closing price (NAV) on the day it is received. (An exception to receiving NAV at sale time is back-end load funds that charge a redemption fee).
6. Mutual funds are often a cheaper way (than individually purchased securities) to get the investing job done. Research and operating costs are shared by the thousands of shareholders. The most efficiently run funds have an expense ratio (the percentage of fund assets deducted for management and operating expenses) of less than 1% a year. Some well-established funds charge annual fees as low as 0.2% to 0.5%. Also, many funds are sold directly through their sponsors with no sales charge-known as “no-load” funds. Funds that charge a sales commission are called “load” funds.
7. Mutual funds are convenient. They can be purchased (and sold) directly from a mutual fund company by mail and by telephone and from full-service brokers, financial planners, banks, or insurance companies. (Important note: when mutual funds are purchased from banks, they are not insured by the FDIC like other bank products.) In addition, some discount brokers have established mutual fund “supermarkets” where investors can own funds from many different fund families in one consolidated account without any sales charges or transaction fees. Earnings from mutual funds can also be automatically reinvested in additional shares. Reinvesting and compounding are keys to building wealth.
8. Automatic withdrawal plans are available, making it possible to have a steady stream of income for retirement (e.g., withdrawals of $250 per month).
9. Mutual funds have less risk of bankruptcy or fraud than many other securities because they are highly regulated by the federal government through the SEC, which is charged with assuring that mutual funds and investment advisors follow specific rules of disclosure.
10. Monitoring mutual funds is simple. Prices are reported daily in the financial section of many newspapers and more in-depth information is available in the Sunday business sections (See Unit 9 for details).