Should I Invest in Mutual Funds?

31 Jul Should I Invest in Mutual Funds?

Posted at 18:44h in risk, investing by Clara Moses 1 Comment Share

The wide world of investment is full of opportunities. Unfortunately, along with these opportunities come a lot of jargon and confusion. Common questions people ask themselves are “What are mutual funds?” and “Should I invest in mutual funds?” Like most things in life, there are pros and cons to doing so. This breakdown will cut through the buzzwords so you can understand what mutual funds are and whether or not investing in them is a good financial fit for you.

Listen to this blog.

7:10

key points

Mutual funds allow investors to diversify their portfolios through professionally managed investments.
Choosing investments should start with your financial goals, time horizon, and risk tolerance.
Mutual funds can simplify investing for those who prefer a hands-off approach.
Understanding the difference between active and passive funds helps you make more informed investment decisions.
A personalized investment strategy is more important than chasing the latest market trends.

table of contents

What is a mutual fund?

A mutual fund is a company that pools money from many people and invests the money in securities such as stocks and bonds. The people who have invested in these mutual funds have bought shares and, in return, receive some of the income generated. Currently, the market houses more than 7,000 different mutual funds.

Why wouldn't I invest in stocks and bonds on my own?

You could! Or you could invest in both mutual funds and individual securities. Part of what attracts people to mutual funds specifically is that professionals choose the securities and manage the portfolio for you. Not only does this tick some boxes on your long to-do list, but it also should mean that someone who is more educated in investing than you is calling the shots. Mutual funds can help the average Joes and Janes of the world invest with confidence. However, you should still do your own research to ensure both the fund and manager are sound and align with your objective.

What's an objective?

This is basically what your goal for investing is, be it long-term or short-term growth. A good practice before investing in anything is assessing your financial goals and risk tolerance. If your financial goals are in the future (perhaps you’re a young person beginning to save for retirement), you may have a higher risk tolerance as you will have more time to make up for any losses that could occur over the years. Conversely, if you are quickly approaching retirement, you’re looking for short-term growth and your risk tolerance is probably lower as you won’t have much time to make up for any losses. As you can see, your situation will inform your goals and tolerance, and in turn you can find a mutual fund with an objective that matches your own.

What type of assets should make up the mutual fund I invest in based on my objective?

If you have a high risk tolerance, investing in a stock fund might be the right choice for your finances. This is a very aggressive investment strategy. On the other hand, if you have a low risk tolerance, go for the conservative choice of a bond fund. Your returns might not be as high, but they will be more consistent, and also your losses will not be so severe. It is important to note that there are many types of bonds with varying risk levels. Also, tolerance is a scale, which is why there are so many types of mutual funds, including balanced funds that mix stocks, bonds, and other securities.

Are there any other arguments for mutual funds?

Another bonus of mutual funds is that they are usually diversified, meaning that they invest in multiple companies across a variety of industries. This makes many mutual funds less risky than investing in a few specific stocks because if one company or industry is suffering, you’re more likely to have shares in others that are still producing returns. However, sector funds, which specialize in a particular industry, also exist.

Are there any arguments against mutual funds?

Many are put off by the fact that mutual funds come with fees, and the structure of these fees can be complex and confusing (although they can usually be easily navigated with the help of a financial advisor). Every mutual fund charges an annual expense ratio to cover overall operating and management expenses. They may also charge load fees when you buy or redeem shares. The thing is, there are plenty of services we pay for simply because we don’t want to do a task or because we wouldn’t be able to do it as well as a professional. It might be time to call the plumber, as they say. The good news is that there are plenty of affordable mutual funds with relatively low costs for both the initial investment and subsequent purchases. Funds are priced mostly based on whether they are actively or passively managed.

What's the difference between an actively managed and a passively managed fund?

Actively managed mutual funds essentially try to beat the market. This process requires more money and more work on the fund manager’s part, which understandably results in larger expense ratios and load fees. The goal of passively managing a fund is to mirror the market versus predict its future. Passively managed funds usually track an index of securities, such as the S&P 500, which consists of the 500 U.S. companies with the largest market capitalization. This requires less management, so the fees are usually lower than those of an active fund.

Really, there are mutual funds out there that fit every objective with fees at varying price points. If you’re still overwhelmed by the thought of choosing which ones to invest in, a financial advisor can offer you helpful guidance. Multiple credible websites can help you research mutual funds, such as Morningstar, Lipper Leaders, Kipling Mutual Fund Finder, MAXfunds, and FundReveal.

Of course, some people enjoy doing their own investing. It all depends on what you’re into and what your goals are. Choosing individual securities on your own can be quite risky, but perhaps that’s part of the fun for you. After all, with great risk can come great reward. However, if dabbling in stocks on your own is your only investment strategy and you’re beginning to approach retirement, it’s probably time to consider making some changes. There are certain times in life when the possibility of a reward is no longer worth the risk of a great loss. Mutual funds might help balance your portfolio. A great way to explore this further is by speaking with a fee-only, fiduciary financial advisor.

Investment Planning

31 Jul Should I Invest in Mutual Funds?

Posted at 18:44h in risk, investing by Clara Moses 1 Comment Share

The wide world of investment is full of opportunities. Unfortunately, along with these opportunities come a lot of jargon and confusion. Common questions people ask themselves are “What are mutual funds?” and “Should I invest in mutual funds?” Like most things in life, there are pros and cons to doing so. This breakdown will cut through the buzzwords so you can understand what mutual funds are and whether or not investing in them is a good financial fit for you.

Listen to this blog.

7:10

key points

Mutual funds allow investors to diversify their portfolios through professionally managed investments.
Choosing investments should start with your financial goals, time horizon, and risk tolerance.
Mutual funds can simplify investing for those who prefer a hands-off approach.
Understanding the difference between active and passive funds helps you make more informed investment decisions.
A personalized investment strategy is more important than chasing the latest market trends.

table of contents

What is a mutual fund?

A mutual fund is a company that pools money from many people and invests the money in securities such as stocks and bonds. The people who have invested in these mutual funds have bought shares and, in return, receive some of the income generated. Currently, the market houses more than 7,000 different mutual funds.

Why wouldn't I invest in stocks and bonds on my own?

You could! Or you could invest in both mutual funds and individual securities. Part of what attracts people to mutual funds specifically is that professionals choose the securities and manage the portfolio for you. Not only does this tick some boxes on your long to-do list, but it also should mean that someone who is more educated in investing than you is calling the shots. Mutual funds can help the average Joes and Janes of the world invest with confidence. However, you should still do your own research to ensure both the fund and manager are sound and align with your objective.

What's an objective?

This is basically what your goal for investing is, be it long-term or short-term growth. A good practice before investing in anything is assessing your financial goals and risk tolerance. If your financial goals are in the future (perhaps you’re a young person beginning to save for retirement), you may have a higher risk tolerance as you will have more time to make up for any losses that could occur over the years. Conversely, if you are quickly approaching retirement, you’re looking for short-term growth and your risk tolerance is probably lower as you won’t have much time to make up for any losses. As you can see, your situation will inform your goals and tolerance, and in turn you can find a mutual fund with an objective that matches your own.

What type of assets should make up the mutual fund I invest in based on my objective?

If you have a high risk tolerance, investing in a stock fund might be the right choice for your finances. This is a very aggressive investment strategy. On the other hand, if you have a low risk tolerance, go for the conservative choice of a bond fund. Your returns might not be as high, but they will be more consistent, and also your losses will not be so severe. It is important to note that there are many types of bonds with varying risk levels. Also, tolerance is a scale, which is why there are so many types of mutual funds, including balanced funds that mix stocks, bonds, and other securities.

Are there any other arguments for mutual funds?

Another bonus of mutual funds is that they are usually diversified, meaning that they invest in multiple companies across a variety of industries. This makes many mutual funds less risky than investing in a few specific stocks because if one company or industry is suffering, you’re more likely to have shares in others that are still producing returns. However, sector funds, which specialize in a particular industry, also exist.

Are there any arguments against mutual funds?

Many are put off by the fact that mutual funds come with fees, and the structure of these fees can be complex and confusing (although they can usually be easily navigated with the help of a financial advisor). Every mutual fund charges an annual expense ratio to cover overall operating and management expenses. They may also charge load fees when you buy or redeem shares. The thing is, there are plenty of services we pay for simply because we don’t want to do a task or because we wouldn’t be able to do it as well as a professional. It might be time to call the plumber, as they say. The good news is that there are plenty of affordable mutual funds with relatively low costs for both the initial investment and subsequent purchases. Funds are priced mostly based on whether they are actively or passively managed.

What's the difference between an actively managed and a passively managed fund?

Actively managed mutual funds essentially try to beat the market. This process requires more money and more work on the fund manager’s part, which understandably results in larger expense ratios and load fees. The goal of passively managing a fund is to mirror the market versus predict its future. Passively managed funds usually track an index of securities, such as the S&P 500, which consists of the 500 U.S. companies with the largest market capitalization. This requires less management, so the fees are usually lower than those of an active fund.

Really, there are mutual funds out there that fit every objective with fees at varying price points. If you’re still overwhelmed by the thought of choosing which ones to invest in, a financial advisor can offer you helpful guidance. Multiple credible websites can help you research mutual funds, such as Morningstar, Lipper Leaders, Kipling Mutual Fund Finder, MAXfunds, and FundReveal.

Of course, some people enjoy doing their own investing. It all depends on what you’re into and what your goals are. Choosing individual securities on your own can be quite risky, but perhaps that’s part of the fun for you. After all, with great risk can come great reward. However, if dabbling in stocks on your own is your only investment strategy and you’re beginning to approach retirement, it’s probably time to consider making some changes. There are certain times in life when the possibility of a reward is no longer worth the risk of a great loss. Mutual funds might help balance your portfolio. A great way to explore this further is by speaking with a fee-only, fiduciary financial advisor.

Investment Planning