Buying a slice of the pie: mutual funds
Purchasing shares of a mutual fund is an indirect way to buy stocks, bonds etc. The fund itself purchases a mix of stocks, bonds, CDs, and other investments and your purchase nets you a ‘slice’ of the mutual fund, thus achieving diversification.
Mutual funds are professionally managed collective investments that are regulated. Hedge funds are not considered mutual funds even though purchasers’ money is commingled.
Of course, share value of a mutual fund can rise as well as fall, representing the performance of the underlying stocks. However, mutual Funds reduce the risk of buying any one individual stock.
Advantages of mutual funds compared to buying individual stocks include:
- Increased diversification
- Daily liquidity
- Professional investment management
- Ability to participate in investments that may be available only to larger investors
- Service and convenience
- Government oversight
- Ease of comparison
Some negatives are:
- Fees
- Less control over timing of recognition of gains
- Less predictable income
- No opportunity to customize
Research funds before buying using websites such as www.morningstar.com and www.cnnfn.com.
Before you buy shares of a mutual fund, look at past performance over the near-term and longer-term. Remember though that past performance does not determine the future. Check out and note any recent changes in fund management.
Finally lean towards no-load funds, which have a lower management fee.
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