You often hear about friends and family members talking about how they invest in stock. They may have chosen a good one or two, and have possibly profited from it. If you buy stock alone, however, it can have some serious downsides, which means you could experience some serious losses. This is why you should consider a mutual fund.
Why Mutual Funds Are Better
A mutual fund is a group of stocks, bonds and short-term debt, says Investor.gov that is bundled together into a portfolio. People who buy stock are taking a gamble – but they could lose a lot. On the other hand, people that buy mutual funds are buying shares in the portfolio, and they profit based on the overall performance of the items in the portfolio.
An individual, who is an expert on stocks, bonds, etc., is selected by the company to be a fund manager. He or she watches over and constantly researches the performance of each of the portfolio’s investments, and adds items that are really doing well and removes items that are performing poorly. It is their job to ensure that their clients continue to have good performing items in the portfolio to get a good return on their investment money. Because of their expert oversight of the funds, an individual investor does not need to watch over their investment like you would if you just owned a few different types of stock.
The Primary Benefit of Mutual Funds
The main advantage of a mutual fund over stocks is that your potential for loss is minimized by spreading your investment over a large number of investment tools. This means that if one of the stocks in the group experiences loss, that the loss may be negated by positive gains from other stocks or bonds in the group. Basically, this approach is likely to minimize your losses and maximize gains.
When a mutual fund is well-diversified, this means that there are many stocks and different kinds of them within a portfolio. Good diversification also means that the stocks and bonds within a particular portfolio cover a wide range of industries, says TheSkilledInvestor.com, because one industry may do poorly for a while – or even fail altogether. A balanced portfolio minimizes the loss and evens things out.
Mutual Funds Are Purchased According to Risk Level
Because mutual funds are heavily invested in the stock market, there is a potential for loss. Investopedia.com advises that potential investors should look at more than the possible returns when investing, but they also need to focus on the potential risks. Of course, a higher risk level means that it is more likely that a loss may occur when investing in a certain product. Those who are older and closer to retirement age should not risk their retirement money in high-risk investments.
Overall, it is better to buy mutual funds than to buy stock in just one or two companies because of the expert supervision over the accounts to ensure good performance, and also because of the greatly reduced risk of loss when one or more performs poorly. There are also costs involved when investing in mutual funds, and costs and various mutual funds should be compared before buying, as well as their risk level and performance.