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.
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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How Do I Select a Mutual Fund? This is where you’ll want to laser focus your attention and become an amateur sleuth while doing your research. The number of mutual funds available to investors right now rivals the number of stocks on the North American exchanges. Each one of these funds is unique but can be categorized based on the type of underlying securities held within it. At the broadest level, a fund falls into one of three categories: equity (which is stocks), fixed income (which are bonds), and money markets (similar to cash).
The process of buying a mutual fund can be done over the phone, online, or in person if you are dealing with a financial representative. To place an order, you would indicate how much money you want to invest and what mutual fund you want to purchase. Whichever mutual fund you select, the price you pay for the shares will be determined by the closing share price at the end of that day.
Mutual Funds Offer Automatic Reinvestment. An investor can easily and automatically have capital gains and dividends reinvested into their mutual fund without a sales load or extra fees. Unless you are looking for income (i.e. dividends separated and deposited into cash for income reasons), you’ll want to choose the option to reinvest dividends and capital gains. This will take advantage of compounding interest, which essentially means that the interest, dividends, and gains will go to buy more shares of your mutual funds, rather than the cash coming out and being deposited into a separate account.