Posted on 05 October 2012.
Investment In Mutual Funds has a number of positive aspects that investors should consider. While investment in mutual funds is not appropriate for all investors, mutual funds can be very worthwhile investment vehicles for long-term investors who have time to let their fund holdings gain value.
The most positive aspect of investment in mutual funds is the risk reduction that mutual funds investment provides. While, mutual funds investment carries general stock market risk, as mutual funds generally move in tandem with the overall stock market, investing in mutual funds eliminates the risk of total loss of investment capital. This is because mutual funds invest money in a number of different stocks, and therefore spread the investment risk across many stocks, which mitigates the concern of total loss of investment in any one stock.
Another positive aspect of investment in mutual funds is that investing money in mutual funds puts investment funds into a professional money manager’s hands. It is important to research mutual funds that one is considering investing in, since the long term returns earned by holding mutual funds can vary considerably from fund to fund. Some mutual fund money managers have much better track records than others. The key is to find mutual funds that consistently beat the returns of their benchmark tracking indexes, which are used to compare the performance of mutual funds to the overall market sector that they invest in.
There are also some drawbacks that investors should be aware of when considering making an investment in mutual funds. The primary drawback to investing in mutual funds is that since mutual funds invest in a large number of companies, their gains can be somewhat limited in a bull market. While mutual funds provide investors a safety net by spreading out their investments amongst numerous stocks, investing in numerous stocks can also limit gains in a hot stock sector. For example, if an investor invested in the technology sector over the past decade by buying Apple Inc.’ stock (AAPL), their gains would have been extraordinary, in the 100s to 1,000s of percent, whereas investing in technology sector mutual funds over the same period would have yielded substantial but much lower gains than high flying technology stocks, such as AAPL. This is because not all technology stocks have performed nearly as well as AAPL over the past decade.
Another drawback to investing in mutual funds is the fact that an investment in mutual funds is reduced by annual fees that are charged to manage the funds. While these annual fees may be justified to pay well performing fund managers to oversee and manage the mutual funds one is invested in, it is important that investors making an investment in mutual funds find funds that strike a balance between annual fees and fund performance, since above average annual fees can significantly reduce long term mutual fund investment gains.
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