INVESTING IN MUTUAL FUNDS
What are mutual funds? Mutual funds enable investors to pool their money and place it under professional investment management. The portfolio manager trades the fund’s underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors.
For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund.
Comparison between Mutual Funds and Stocks
Mutual fund companies invest in a variety of stocks, bonds, and money-market investments, so mutual funds carry much lower risk than stocks.
By purchasing mutual funds, you are essentially hiring a professional manager at an especially inexpensive price. These managers have been around the industry for a long time and have the academic credentials to back it up.
Greater Upside Potential
Individual stocks have a greater upside potential than most mutual funds. Fluctuation in stocks is greater than mutual funds, so you have greater chance to earn more return.
Risk and Return
In general, Risk and return depend each other, the greater the risk, the higher the potential return; the lower the risk, the lower the expected return. Mutual funds try to reduce their risk by investing in a diversified group of individual stocks, bonds, or other securities.
Mutual funds have large sums of money to invest and often they trade commission-free and have personal contacts at the brokerage firms.
By investing in stocks you can get more return than mutual funds but, by investing in mutual funds your risk is lower. Mutual funds are great for funding retirement plans and investors that don’t have the time or energy to consider individual stocks.
It is noticeable that most expert traders in stock market invest in mutual funds too. I recommend investing in both of mutual funds and stocks but, if you have experience, time and energy you can invest most of your money in individual stocks.