According to industry watchers, the net asset value of mutual funds across the United States stood at $17.71 trillion as of 2018.
Many individuals are looking to put their wealth into securities and other assets. However, due to the small size of their checks, investing in securities carries high costs.
Mutual funds come in to help aggregate individual investors. A principal mutual funds advantage is that you enjoy more convenience in investing. Here are seven reasons why a mutual fund is right for you.
What Is a Mutual Fund?
A mutual fund is an investment firm that brings together money from various investors to buy large-sized assets.
The assets that mutual funds typically put their money into are stocks, bonds, and other securities. The total sum of all the holdings a mutual fund invests in is called a portfolio and is managed by paid professionals.
When you give a mutual fund your money, you’re effectively buying its shares to become a part-owner earning from the income it generates.
How Mutual Funds Work
Regardless of the kind of fund you invest in, its performance (and revenue) will depend on its kind of management.
A passive mutual fund will invest according to a set strategy whose goal is to match a particular market index. As a result, these kinds of mutual funds don’t require you to have deep investment skills.
Passive funds charge lower management fees since they don’t call for as much hands-on management.
It’s worth noting that two popular types of passive mutual funds today are exchange-traded funds (ETFs) and index funds.
Actively traded funds, on the other hand, work to outperform the market indices. Consequently, they hold the potential to earn you more. They also carry a higher risk than passively traded funds, which you must put into consideration.
How Do You Make Money With a Mutual Fund?
Once a mutual fund makes a profit, there are three ways that you, as an investor, can earn a return – dividends, net asset value (NAV), or capital gains.
Dividends come from when the fund receives interest on the share it holds. Each investor in the fund gets a proportional amount, and you can choose to reinvest that in the fund.
When a mutual fund sells a security at a higher price than it bought it, it makes a capital gain. You’ll receive your portion of this income annually from the fund.
NAV is where the security you own increases in value due to the fund’s astute management. While you don’t immediately receive funds from the growing NAV, it means you stand to make more money should you sell your stake in the fund.
Mutual Funds Advantage
Mutual funds hold distinctive advantages as tools to help you grow your wealth. These benefits include:
1. Your Investment Is Diversified
Any financial consultant will tell you to take a diversified approach when it comes to wealth management. Diversification is whereby you mix the resources and investments in your portfolio to reduce the risk you face.
A mutual fund helps you to access various investments that face varying risks that can offset one another.
As a result, if a crisis or loss hits one sector, you won’t face as significant a loss as investments in other sectors can help offset the outflows.
2. Economies of Scale
One of the most compelling features of a mutual fund is the scale at which it operates. When many investors come together and pool their funds, they can buy into more lucrative assets that would have been hard to purchase as individuals.
Additionally, because of the large size of mutual funds, individual investors pay less for the service.
3. There’s Professional Management
If you don’t like picking the stocks to buy due to a lack of time or in-depth knowledge, then a mutual fund is for you.
Each mutual fund employs professional managers who do the heavy lifting with the research, picking stocks, and managing the portfolio. Thus, you get to access a full-time investment manager to help you grow your holdings at a fraction of the cost.
4. Liquidity
When you’re considering an investment as an individual investor, you have to assess its liquidity. The easier it is to sell what you hold, the faster you can access your money when you need it.
You can buy and sell a mutual find relatively easily unlike say disposing of property you have invested in.
In case you need money urgently, you can sell your holding in the fund fast. Should you spy out an opportunity in a sector your fund invests in, you can quickly and easily take up a position to benefit.
5. There’s Variety
As an individual investor, a mutual fund opens up a variety of options to put your money in that you’d not access on your own.
For example, a manager can run a fund that employs several investment approaches. You can access value investing, macroeconomic investing, and other methods all in one package.
Some mutual funds (known as bear funds) are structured to make money from a falling market. Such funds can enable you to protect your downside in ways you couldn’t as an individual.
Through this variety, you get to access foreign and domestic deals that can attractively grow your portfolio.
6. Easy Access to Specialized Sectors
If you’re interested in securing a position in complex sectors as an individual investor, then a mutual fund is the best tool to use.
Mutual funds have built up a track record of tackling extremely complex investment areas in a logistically easier manner for you. With one, low ticket investment, you get to outsource all the hard work that goes into such investment selections.
7. Transparency in Investment
Where you put your hard-earned money to work for you must be secure, and mutual funds give you this advantage.
Every mutual fund is heavily regulated to ensure investors are treated fairly. Therefore, with a mutual fund, you can have peace of mind since there is greater visibility into where you invest your money.
Let Your Money Work for You
Securities are a great way to grow your wealth, but as an individual investor, it can be costly to invest in them. A mutual fund is a vehicle through which your small check can make consistent returns. Another significant mutual funds advantage is the convenience you have as professional managers handle things. Pull together with other small investors to gain access to consistent investment returns.
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