Mutual funds give investors the ability to diversify across a wide variety of investments that they otherwise may not carry in their portfolio as individual securities. Since mutual funds invest in a diverse range of securities and investment options, one mutual fund share actually represents proportionate ownership in each and every investment in the mutual fund’s portfolio. Of most interest to investors is that each share also proportionately represents the profits of those investments as mutual funds are required to pass along profits to their investors by way of mutual fund distributions, which come in several forms.
Mutual Funds Have High Sales Charges. Should a sales charge be included in the disadvantages of mutual funds list? It’s difficult to justify paying a sales charge when you have a plethora of no-load mutual funds. But, then again, it’s difficult to say that a sales charge is a disadvantage of mutual funds when you have thousands of mutual fund options that do not have sales charges. Sales charges are too broad to be included on my list of disadvantages of mutual funds.
Target Date Mutual Funds: These funds invest in a mix of stocks, bonds, and cash that is appropriate for a person investing until a certain year, which is usually retirement. As the target year approaches, the fund manager will gradually decrease market risk by shifting fund assets out of stocks and into bonds and cash, which is what an individual investor would do themselves manually. Therefore, target-date mutual funds are a type of ”set it and forget it” investment that doesn’t require ongoing management. For example, if you are saving for retirement and think you may retire around the year 2035, a good choice for you might be Vanguard Target Retirement 2035 (VTTHX). Once you choose your first mutual fund, you’ll have the foundation started. You can then build upon that foundation by purchasing more shares of this fund and eventually add more funds for greater diversity.
Once you know your investment objective, which will include the number of years to invest and how much risk you’re willing to take, you can choose the best mutual fund or funds for you. And depending upon the types of mutual funds you use, the ongoing maintenance required may be little to nothing. Mutual Funds Offer Professional Management. One of the primary reasons investing mutual funds is easy is because they’re professionally managed. Rather than researching, analyzing, buying and selling stocks or bonds yourself, you have a skilled money manager doing it for you. Professional management is at the core of how mutual funds work: When investors buy shares of mutual funds, they’re pooling their money together. Managers use this pool of money to buy the stocks or bond securities that end up forming one portfolio.
Saving for Your Initial Mutual Fund Purchase. Most mutual funds have what’s called a minimum initial purchase, which is the amount you’ll need to have saved prior to buying shares of your first fund. Most mutual fund companies have minimum initial purchase amounts of at least $1,000. For example, most of Vanguard’s mutual funds have a minimum initial purchase requirement of $3,000. Fidelity funds are typically at $2,500. However, once you make your first purchase, subsequent purchases of the same fund are usually as low as $100.