We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all, mutual funds hire professional analysts who are market experts and devote many hours of study to the various stocks. Unless you want to devote much of your free time to studying financial reports, you probably will not have as much information to decide on as a mutual fund manager.
Then, there is the well-documented advantage of diversification. Risk is reduced by holding several non-correlated investments. But, some go up, some go down, and combine the return levels of the fluctuations or risk.
Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.
Given the above advantages, it’s no wonder that mutual funds have become a very popular form of investing. Now, there are thousands of mutual funds to choose from, so how does one select? Here are a few tips:
- Do not be seduced to jump on the recently performing best fund. It may seem like the safe and rational thing to do, but like individual stocks, you want to buy low and sell high, not buy high and pray for more growth.
- Even good funds may not be able to overcome the force of the overall market. It would help if you were looking for funds that can exceed the broad market without increasing risk. Each fund has certain risk parameters that it is required to follow. Read the prospectus closely to understand what these are.
- Limit the number of funds that you own. Unless you are trying to achieve the same returns as the broad market, diversifying into many mutual funds will not reduce your risk or increase your return by much.
- Funds that become too popular and too big tend to slip in performance. There are several reasons for this.
Find more valuable mutual fund resources at https://www.morningstar.com/.
One final point to remember is that the type of fund will depend on your investment objectives. Certain funds are designed for your objectives, be they retirement, income, growth, funding the kids college, etc. If you prefer to skip mutual funds but like their concept, please examine and look into Exchange-Traded Funds or ETFs. They operate like a mutual fund but trade throughout the day like stocks and tend to follow an index of some sort.
For more information on mutual funds or exchange-traded funds, don’t hesitate to contact me directly. I am available for comprehensive financial planning for those in or around the Metro-Nashville area. For those outside middle Tennessee, I can work with you on a remote basis or seek out a qualified fee-only Registered Financial Consultant (RFC) near you.
