If you contribute to a retirement fund, more than likely you invest in mutual funds. Everyone knows they are basically invested in the stock market, but they do not know what their money is actually invest in.
What are Mutual Funds?
A mutual fund is a pool of investors money that is managed by professional investment managers. The majority of mutual funds are invested into the stock market, but a mutual fund can also be invested in other vehicles such as bonds or money markets.
Why Not Just Invest in Stocks?
The main advantage to investing in mutual funds is that investors with smaller portfolio values can diversify in different markets, much like investors with millions of dollars to invest. Each investor owns shares of the fund, meaning each participant’s portfolio increases or decreases the same. Another advantage of investing in funds is that your money is professionally managed. If you were to invest in individual stocks, your portfolio’s performance would rely on the companies you own stock in. Commission of buying and trading shares of companies are less with mutual funds because of the economies of scale. The bigger the order, the smaller the commission percentage. Funds are also very liquid investments, meaning if you needed your money fast, you can easily sell your sales and receive a check, just like with individual stocks.
Are there any Disadvantages of Investing in Mutual Funds?
The funds are professionally managed, which mean there are many people making a living by working at the fund. Most funds charge a set management fee, usually in the 1-1.4% range. This fee is charged regardless if the market is performing great, or in the toilet. Before you invest in mutual funds, be sure to fully understand the fees and even shop around. Another drawback to investing in mutual funds is taxes. If a fund manager were to sell a security within the company, you are liable for capital gains taxes.
Are Mutual Funds Worth the Costs?
Let’s face it, anything worth having is going to cost you. Personally, I stay away from mutual funds. This is because I feel that I have enough experience with investing that I can properly manage my portfolios for less money that an investment company. I would definitely recommend investing in mutual funds to the average person looking for a solid retirement vehicle. As always do your research and be very aware of the fees involved with any investment you make.