The advantages of investing in a mutual fund over trying to pick individual stocks is something we have all heard of. First of all, professional analysts that devout many hours of study to the various stocks and are also known as market experts are hired by mutual funds. To study the financial reports, you need to devout a large portion of your free time and unless you are willing to do this, then you won't have as much information to make a decision as a mutual fund manager.
The well documented advantage of diversification is another thing you shouldn't forget. You can reduce risk by holding several non-correlated investments. To put it simply, some would go up and others would go down and the return levels off the fluctuations or risk when combined.
Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.
Mutual funds have become a very popular form of investing and it's no surprise given the above advantages. But how does one make a selection since there are about thousands of mutual funds to choose from? Here are a few tips:
Jumping on the recently performing best fund is what you need to avoid. This may seem like safe and rational but just like individual stocks, what you want to do is buy low and sell high and not buy high and pray for more growth.
It's likely that good funds may not be enough to overcome the force of the overall market. Funds that can exceed the broad market without increasing the risk is what you should be looking for. Each fund has certain risk parameters that it is required to follow. Carefully read the prospectus in order to understand what these are.
Limit the number of funds that you own. Unless achieving the same returns as the broad market is what you are trying to do, then diversifying into many mutual funds will not reduce your risk nor will it increase your return.
If funds have become too big or too popular, then they tend to slip in performance. Several reasons contribute to this.
The type of fund being totally dependent on your investment objectives is one final point you need to keep in mind. Whether they are for retirement, income, growth, funding the kids college, etc., there are certain funds that are designed for your objectives.
The well documented advantage of diversification is another thing you shouldn't forget. You can reduce risk by holding several non-correlated investments. To put it simply, some would go up and others would go down and the return levels off the fluctuations or risk when combined.
Finally, a mutual fund offers smaller investors a chance to invest in small increments rather than having to save a large chunk of cash to purchase 100 shares of stock.
Mutual funds have become a very popular form of investing and it's no surprise given the above advantages. But how does one make a selection since there are about thousands of mutual funds to choose from? Here are a few tips:
Jumping on the recently performing best fund is what you need to avoid. This may seem like safe and rational but just like individual stocks, what you want to do is buy low and sell high and not buy high and pray for more growth.
It's likely that good funds may not be enough to overcome the force of the overall market. Funds that can exceed the broad market without increasing the risk is what you should be looking for. Each fund has certain risk parameters that it is required to follow. Carefully read the prospectus in order to understand what these are.
Limit the number of funds that you own. Unless achieving the same returns as the broad market is what you are trying to do, then diversifying into many mutual funds will not reduce your risk nor will it increase your return.
If funds have become too big or too popular, then they tend to slip in performance. Several reasons contribute to this.
The type of fund being totally dependent on your investment objectives is one final point you need to keep in mind. Whether they are for retirement, income, growth, funding the kids college, etc., there are certain funds that are designed for your objectives.
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