Are you ready to begin investing? You’ve probably started to look at a few stocks maybe even checking the news for information of stocks that are ready to jump. It’s typical to start this way, but what if you do not feel confident in your ability to pick the right stocks? There are so many out there and if you choose the wrong one, you risk losing the money that you’ve invested. It is for this very reason that many investors choose to invest through mutual funds. But are mutual funds really worth your money?
Mutual Fund Definition
Mutual funds is are managed portfolio of assets. The assets could be stocks, money market instruments, municipal bonds, government bonds or corporate bonds. The mutual fund strategy is guided by the prospectus which also lists the risks associated with the mutual fund. The prospectus is probably the most important document for a mutual fund because it guides the investment objectives. A money manager or portfolio manager will select stocks for the portfolio based on the investment objective and each investor owns a unit of the overall fund. Each investor shares in the gain or loss and is entitled to the NAV for each unit.
Mutual Fund NAV
A mutual fund NAV is the Net Asset Value of the fund per unit. For example, if a mutual fund has 1000 in assets and there are 10 investors with one unit each, the net asset value would be 100 dollars. If the stocks in the portfolio were to increase in value, the net asset value per unit would also increase. Mutual fund prices/NAVs are usually less volatile than individual stocks and a typical NAV may only change a few cents each day.
Advantages of Mutual Funds
Arguably the biggest advantage of owning a mutual fund is the benefit of diversification. If you were to mimic a mutual fund and purchase shares in each individual stock, you would have to have a lot of cash to really benefit from diversification. A mutual fund allows you to get the same diversification without the cost of purchasing each stock individually.
Another advantage is the potential income with mutual funds. The portfolio is often managed to provide investors with distributions or dividends from the stocks or bonds in the portfolio. Another potential distribution is the capital gain. A capital gain is a distribution from a stock or bond that was sold at a profit or gain.
Disadvantages of Mutual Funds
Right now I bet mutual funds are starting to look pretty good for you as an investor right? But there are some disadvantages that make me wonder if they really are worth the money. The first reason I think mutual funds may not be worth the money is that mutual funds are full of fees. When you decide to buy a stock, you pay the broker dealer a fee and when you sell, you pay a fee again, one to the broker dealer and they pay the securities exchange fee. This is the only fee that you have to worry about with a broker dealer. Obviously, if you are with a broker that recommends stocks, you may have to pay a fee for that service, but that is typically where the fees end. With a mutual fund, there are a few fees.
- Front End Fees to buy the mutual fund
- Back End fees to sell the mutual fund
- Administrative fees
- Management fees
- Legal fees
With these fees, sometimes the gains from the mutual fund are a wash; that is, the fees eat all or most of the gains. The trick is to find the mutual funds that have low fees and steady performance.
Are you a mutual fund investor? Do you think mutual funds are worth the money?