The Mutual Fund Advantage

The Mutual Fund Advantage

Mutual Fund Investing vs. Stock Investing

It seems strange to compare mutual funds to stocks since mutual funds are primarily composed of stocks, but it is important to distinguish the two because there are some notable advantages to using mutual funds.

Get Focused

I will admit that investing in individual stocks can be fun because each company has a unique story. However, it is important for people to focus on making money. Investing isn't a game. Your financial future depends on where you put you hard earned dollars and it shouldn't be taken lightly.

Diversification

There is no greater advantage to using mutual funds than diversification. Do you honestly believe wealthy investors purchase just a couple of stocks? Of course not! If they are not using mutual funds (many do), than they are purchasing a large number of stocks.

Smart investors diversify because it greatly reduces risk without sacrificing returns. If the idea of diversification is new to you, I recommend this article.
Professional Management

By purchasing mutual funds, you are essentially hiring a professional manager at an especially inexpensive price. It would be a bit cocky to think that you know more than mutual fund manager. These managers have been around the industry for a long time and have the academic credentials to back it up. Saying you could outperform a mutual fund manager is similar to a football fan sitting on their couch saying "I could have made that catch" -possible, but not likely.
Even if some of us are better at picking stocks than a professional and their support staff, most of us would not want to spend the amount of time it takes to watch, research and trade the market on a daily basis.

Efficiency

By pooling investors' monies together, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free and have personal contacts at the brokerage firms.

Ease of Use

Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The bookkeeping duties involved with stocks are much more complicated than owning a mutual fund. If you are doing your own taxes, or are short on time, this can be a big deal.

Liquidity

If you find yourself in need of money in a short amount of time, mutual funds are highly liquid. Simply put in your order during the day and when the market closes a check will be sent to you or you can have it wired to a bank account. Stocks can be much more difficult depending on what kinds of stocks you are invested in. CD's offer no liquidity (not without a hefty fee) and bonds can be difficult, too. Some mutual funds also carry check writing privileges, which means you can actually write checks from the account, similar to your checking account at the bank.

Cost

Mutual funds are excellent for the new investors because you can invest small amounts of money and you can invest at regular intervals with no trading costs. Stock investing, however, carries high transaction fees making it difficult for the small investor to make money. If an investor wanted to put in $100 a month into stocks and the broker charged $15 per transaction, their investment is automatically down 15 percent every time they invest. That is not a good way to start off!

Wealthy stock investors get special treatment from brokers and wealthy bank account holders get special treatment from the banks, but mutual funds are non-discriminatory. It doesn't matter whether you have $50 or $500,000, you are getting the exact same manager, the same account access and the same investment.

Risk

In general, mutual funds carry much lower risk than stocks. This is primarily due to diversification (as mentioned above). Certain mutual funds can be riskier than individual stocks, but you have to go out of your way to find them.

With stocks, one worry is that the company you are investing in goes bankrupt. With mutual funds, that chance is next to nil. Since mutual funds typically hold anywhere from 25-5000 companies, all of the companies that it holds would have to go bankrupt.
I won't argue that you shouldn't ever invest in individual stocks, but I do hope you see the advantages of using mutual funds and make the right choice for the money that you really care about.