Mutual Funds Are Diversified Investments. The nature of mutual funds as pooled investments that are professionally managed means that investors generally can easily accomplish one of the most important standards of smart investing — diversification. To diversify means to spread market risk by holding a variety of several different securities, rather than just a few. Most mutual funds invest in dozens or hundreds of stocks or bonds within one portfolio. Depending upon the type of fund, this accomplishes the fundamentals of diversification with as little as one or two mutual funds. However, when building a portfolio of mutual funds, especially as investment assets and objectives grow more complex over time, investors are smart to diversify across several funds in different categories.
Opening an investment account is incredibly easy at most mutual fund companies. The easiest way to open an account is online. Information required will include things you already know, such as your name, address, date of birth, and social security number. You’ll also need to know which type of account is best for your investing needs. Here are the basic account types and how they work: Individual Brokerage Account: This is a regular brokerage account established for an individual (one person). Contributions are not tax-deductible, and investors pay taxes on capital gains and dividends. For more on this, see this article on taxation of mutual funds.
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Each investor is charged a percentage of his or her investment to help cover all the costs of running the mutual fund, including having a professional fund manager as well as researching, buying, and selling stocks. But again, investors can benefit from their collective investments. Mutual fund fees are spread out over all of the investors, so the costs to each individual investor is still much less than it would have been if he or she had purchased the stocks directly and paid a broker or financial advisor to manage the investments. Though many mutual fund options are indeed cost-effective, there are many types of mutual fund fees, from front-load fees to constant-load fees, so it is always best to be aware of the type of fee and how it is calculated before investing in a mutual fund.
Before you invest in mutual funds, you should do your homework. And fortunately, we’re here to help you with that! Which funds are the best to use? Will you choose to use mutual funds, closed-end funds, ETFs, and/or individual stocks and bonds? Inevitably, your homework assignment will lead you to articles outlining the disadvantages of mutual funds. But are all of these so-called disadvantages of mutual funds really disadvantages of mutual funds? Let’s take a look at several so-called disadvantages of mutual funds, and how you can avoid them.
Other Types of Mutual Funds: Index Funds. Today, not all funds are managed by a financial manager. Index funds use a computer program to buy all of the stock in a particular index, such as the Russell 3000 or the S&P 500, regardless of how they’re performing. They don’t have to do research or try to time the movement in the market to buy or sell at the ”right” time. Index fund fees, therefore, are generally much lower than the fees for managed funds, and, therefore, the return on investment is higher.