All Mutual Funds Have High Capital Gains Distributions. If all mutual funds sell holdings and pass the capital gains on to investors as a taxable event, then we have a found a winner for the list of disadvantages of the mutual funds list. Oh well, not all mutual funds make annual capital gains distributions. Index mutual funds and tax-efficient mutual funds do not make these distributions every year. Yes, if they have the gains, they must distribute the gains to shareholders. However, many mutual funds (including index mutual funds and tax-efficient mutual funds) are low-turnover funds and do not make capital gains distributions on an annual basis.
S&P 500 Index Funds: Index funds can be a great place to begin building a portfolio of mutual funds because most of them have extremely low expense ratios and can give you exposure to dozens or hundreds of stocks representing various industries in just one fund. As their name suggests, index funds simply hold the same securities that are found in an index. S&P 500 Index funds invest in approximately 500 of the largest U.S. companies. Index funds are passively managed, which means their primary objective is to mirror the holdings and performance of an index and therefore costs to operate these funds are extremely low. Therefore, you can meet the initial goal of getting a low-cost, diversified mutual fund when you buy index funds. For more on index funds, check out our Index Investing FAQ page. Again, mutual fund companies like Vanguard, Fidelity and T. Rowe Price are good places to find the best index funds. You can also look at Charles Schwab.
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Investors Can Buy Many Different Types of Mutual Funds. Investment objectives are unique to every investor, which means that there are many different reasons to buy mutual funds. Fortunately, there are several categories of funds that can suit any investment need. Some of the most common investment objectives include retirement and education, each of which may require different funds to suit the needs of the investor. Target retirement funds are good examples of low-cost, diversified funds tailored to meet a variety of time horizons. This category of funds will invest in other mutual funds that combine to be suitable for a certain age range of investor. Target retirement funds are categorized by decade. For example, a 25-year old investor may expect to retire in 35 to 45 years. Therefore a fund like Vanguard Target Retirement 2050 (VFIFX) can work well in a 401(k) or IRA for this investor.
Mutual Funds are Professionally Managed. Many investors don’t have the resources or the time to buy individual stocks. This is where professional management is valuable. Investing in individual securities, such as stocks, not only takes resources but a considerable amount of time. By contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund.
There are many reasons to buy a mutual fund, including diversification, systematic investing and accessibility. We narrowed down the many benefits of mutual funds to 10 reasons these investment securities can be smart tools for your financial objectives. Mutual Funds Offer Diversification. Diversification may be the greatest benefit of mutual funds. The beauty of investing in mutual funds is that you can buy one fund and obtain instant access to hundreds of individual stocks or bonds. Otherwise, in order to diversify your portfolio, you might have to buy individual securities, which exposes you to more potential volatility.