02 Apr Endowment Model #5: Mutual Funds
The Endowment Model #5: Mutual Funds
Although the concepts of stocks as an investment vehicle may be easy to grasp, understanding how to properly invest in them is a completely different story. In this need for understanding a new investment vehicle was born, the Mutual Fund. Mutual Funds are great investment vehicles for people new to investing and those looking to bolster their current portfolio. Which makes it no surprise that Mutual Funds are the most popular and widely used investment vehicle in the country. This article will help you get a better idea of Mutual Funds and what they can do for you and your financial goals.
By definition, a mutual fund is an investment vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market investments, and other assets. They are operated by professional money managers who allocate the funds assets in an attempt to make that profit. The whole idea behind mutual funds is to give the everyday investor access to professionally managed portfolios of equities, bonds, and other securities. The performance of the fund depends on the total performance of the underlying securities. The pros and cons of this type of investment vehicle depend on who you ask but they might not be for everybody.
The advantages of investing in mutual funds are peace of mind and the idea that you don’t have to manage your money yourself or think too hard about it. For one, it is managed by a professional money manager. Somebody who’s job it is to know how to move money in the market. Also, there is not a large risk factor considering the vast amount of investments a mutual fund is involved in. The diversification is solid when it comes to most mutual funds. There is also less volatility in mutual funds. This comes from the fact that they are only traded once per day at the end of the trading day.
The professional money management, however, is not free. You do have to pay a minor fee to have your money professionally handled. Basic management fees are not the only fees that are involved in many mutual funds, some of them have expense ratios and sales charges, which are just other expenses that go into the servicing of your money with all of the different investments the fund is involved in. Also, mutual funds are not the most tax-efficient vehicles out there. For example, if the mutual fund pays out dividends, you could be earning more money but getting taxed heavier. While some mutual funds with government bonds can be completely tax-exempt. Also, Mutual funds cannot diversify the same way a traditional portfolio can. This is simply because mutual funds are organized based on the financial cap of the investments or the sector that they are in. This means that they are always limited by some sort of restriction. Mutual funds also add diversification to your portfolio, but they do not allow for tactical control. If there is an industry that is falling in the market and your mutual fund is invested in it, you cannot rearange your investment in your best interest. In this way, mutual funds are more illiquid than traditional stocks and most alternatives.
It is important to make sure that you are aware of the specific drawbacks and bonuses that your mutual fund holds, to ensure that your investments are doing the most they can for your financial goals. When you work with a registered investment advisor, you have access to every investment vehicle necessary to make your financial dreams a reality.