With the recent corporate scandals still fresh in investor's minds, where can one turn to invest with relative safety and have the prospect of a good rate of return? Interest rates are still near historic lows, suggesting that money market accounts and bonds are not the places to get those returns. Individual stocks promise decent returns, but are very volatile. It requires a great deal of money to properly diversify into an adequate number of stocks, and commission costs eat into any return realized by stocks. Real estate presents another alternative, and it has done well over the years. However, this is not a passive investment & there are maintenance and upkeep costs. Also, real estate is not a liquid investment if the investor needs cash quickly.
Where does this leave the investor? The answer is mutual funds. A mutual fund is defined as a pool of investors - money invested and managed by a fund manager. Money can be invested in the fund or withdrawn at any time, with few restrictions, at net asset value (the per share market value of all securities held) minus any loads and/or fees. There are many different types of mutual funds, offering investors a wide choice. Each mutual fund has a stated investment objective that can be found in that fund's prospectus. Examples of some objectives include funds specializing in the stocks of large capitalization firms in the US, those specializing in growth stocks, value stocks, energy stocks, international stocks, etc.
Each mutual fund has its own internal fees, typically around 1%. An investment advisor can assist the investor in designing a balanced portfolio of such funds that is tailored to his or her risk tolerance. Even if that advisor charges fees up to 1% of investment assets, mutual funds are still a very cost-effective investment. The advisor is typically able to acquire funds that the individual investor cannot get, such as the institutional share classes that have lower internal costs but normally require large initial investments. Here are five major advantages of investing in mutual funds:
- Diversification
As implied above, each equity mutual fund invests in many different stocks. Thus if one of those companies whose stock was held by the fund were to go out of business, the effect on the fund's overall value would be marginal. This is as opposed to an individual investor in that one stock who would lose his or her entire investment in that stock (think Enron!). An investment advisor can bring a second level of diversification by blending mutual funds with different objectives within a portfolio. While it is true that a few mutual fund families have been tainted by scandal, the net effect to the individual investor has been small, and mutual funds are one of the most regulated investments within the financial services industry.
- Low Expense
Of the several thousand funds in the universe of mutual funds, about half are classified as 'no-load.' This means there is no front or back-end charge to purchase such funds. Investment advisors can acquire most load funds at no-load, thus increasing the selection for investors.
- Professional Management
When a famous bank robber was asked why he robbed banks, he responded, "That's where the money is!" For the same reason, this is why the best money managers in the world become mutual fund managers. Why should they stay as individual investment advisors managing tens of millions of dollars, when they can manage a fund with hundreds of millions or even billions under management? These managers have full-time staffs devoted to analyzing what are the best investments for the fund. An investment advisor can help the investor select the best of these managers using a number of objective criteria.
- Liquidity
By nature mutual funds are very liquid investments, meaning they can be converted into a money market fund usually within 24 hours.
- Access to All Markets
Depending on the objective of the fund(s) chosen, the individual investor can literally be an international investor, with access to markets around the world for a modest investment outlay.
With the recent corporate scandals still fresh in investor's minds, where can one turn to invest with relative safety and have the prospect of a good rate of return? Interest rates are still near historic lows, suggesting that money market accounts and bonds are not the places to get those returns. Individual stocks promise decent returns, but are very volatile. It requires a great deal of money to properly diversify into an adequate number of stocks, and commission costs eat into any return realized by stocks. Real estate presents another alternative, and it has done well over the years. However, this is not a passive investment & there are maintenance and upkeep costs. Also, real estate is not a liquid investment if the investor needs cash quickly.
