When you are interested in investing in the stock market, you may believe that you need to buy individual stocks. Stocks buy you an ownership share in a company. However, investing in stocks can be a very risky proposition. Fortunately, it isn’t the only way to take advantage of gains to be made in the stock market. Another, better option is to purchase mutual funds.
Benefits of Mutual Funds Over Stocks
When you invest in individual stocks, the success of your investment is dependent upon a particular company or companies performing well. For example, if you decide to invest all of your stock in a certain computer company and the company goes bankrupt or suffers bad financial news, you could lose some or all of your investment.
While some people try to minimize this risk by investing their money in several different individual stocks- say, for example, buying a computer company, an energy company and a retail company, it can be challenging to make sure that your portfolio is diverse enough to protect you. You’ll also need to have a pretty significant amount of money to invest in order to be properly diversified. You don’t want to buy just a few shares of each stock or company since most of your profits would then be eaten up by paying commission for buying and selling the stocks. Instead, you’d need to invest enough in each company to make the investment worthwhile- which would mean coming up with quite a bit of cash to buy multiple shares in multiple companies.
When you buy a mutual fund, on the other hand, your money is pooled with many other investors. The money is then managed by a professional who invests all of the cash in a variety of different stocks. As the mutual fund as a whole makes money, your shares- which bought you ownership in everything the fund owns- also earn money.
Mutual funds are diversified because the manager of the fund invests in a variety of different carefully chosen stocks and investments and because there is a larger amount of money to work with to invest into these different stocks. Mutual funds spread the risk of loss around different stocks and different investors so they are more likely to perform well than individual stocks.
You can also choose mutual funds that are appropriate to your situation. For example, you can opt for a target date mutual fund that will have the right mix of stocks and bonds based on how soon you plan to retire. You can also invest in mutual funds that are designed to earn income or mutual funds that are designed to produce a greater return on investment by investing in more risky stocks. This lets you set specific goals for your investments that you can achieve more easily just by buying one single fund.
Mutual funds, on the whole, make investing easy for even the novice investor. You’ll need to pay attention to a few details such as the fees charged by the fund and the type of mutual fund you are buying, but you won’t have to worry so much about actively watching and managing your investment as you do when trying to buy an individual stock. Many mutual funds historically outperform the market as well, so you can earn a good return while taking few chances with your hard-earned money.