Mutual funds are a popular way to gain entry into the stock market today. With a small amount of money, you can own shares of hundreds of companies, regardless of their share price. But this is just one of the advantages of mutual funds. Below I present many of the advantages of mutual funds and why you should consider them as part of your investment portfolio. (In another post, I discuss the disadvantages of mutual funds.)
6 Advantages Of Mutual Funds
Low Cost Of Entry
Buying into a mutual fund is only going to cost you $500 to $1,000. Granted if you are looking at investing with Vanguard the entry price is $3,000 but most funds require much less than this with your initial investment. Having this low cost of entry allows many more people to start investing and earn a higher return than what the bank pays on their savings account or certificate of deposit.
What’s also great about mutual funds is that any subsequent investment that you make, the minimum investment amount is much less – typically $50 to $100 dollars. This means that making ongoing investments isn’t going to break your budget and you can easily invest on a monthly basis. This is one of the keys when becoming a stock market millionaire.
When you buy a mutual fund, you are buying a handful of underlying investments with your money. Instead of saving up $1,000 to buy a few shares of Apple and then saving up another $1,000 to buy Google, you can invest $1,000 and buy Apple, Google and a few hundred other companies at once! Here is what this looks like visually:
The fact that you are instantly diversified with mutual funds takes away some of the risk associated with investing. Think of it this way: Let’s say you just bought $1,000 worth of Apple stock. News comes out that they are discontinuing the iPhone. As a result the share price plummets 50%. At the end of the day, you just lost 50% of your investment.
On the other hand, if you had invested that $1,000 in a mutual fund that owned Apple, you would not have lost 50% of your money. Chances are that Google and the other holdings weren’t affected in a negative way by the news from Apple. As a result, you might lose some money or you might gain some money, it all depends on how large of a holding Apple is in the mutual fund. This is how a mutual fund takes away some of the risk of investing.
When you invest in a mutual fund, you have a team of professionals managing the fund. This means that you don’t have to spend your weekends analyzing stocks. The mutual fund management team makes its living off of analyzing the investments of the mutual fund. You do pay a fee for this service, but if you pick the right mutual funds, the small fee is more than worth the cost.
What are the right mutual funds? Any fund that is considered an index fund is a safe bet. This is because the mutual fund will track an underlying index, like the S&P 500 for example. Because the fund won’t be buying and selling all of the time, the management fees tend to be lower than the average.
Own High Price Companies
This advantage is related to the low cost of entry point above. Whereas above I talked about owning a bunch of companies for little money, here I am talking about owning high stock price companies for little money.
That $1,000 you used to initially invest in bought you thousands of companies. Included in there are the likes of Google and Apple, two stocks that have high stock prices. It would take a long time to save up to buy into Google. But with a mutual fund, you can start owning a piece of Google with much less money.
Mutual funds are governed by the Securities and Exchange Commission (SEC). They are required to follow specific laws and regulations. If they do not, they will lose the ability to operate.
This alone makes mutual funds a smart investment. Unlike with hedge funds, where a person like Bernie Madoff can scam you out of your money, a mutual fund cannot do this. They have to report to the SEC and file tax returns each year. In other words, you are protected by investing in mutual funds. (Note that this doesn’t mean you are protected from losing money, because you aren’t. You are only protected in the form of scams.)
Ease Of Comparison
At last check, there were close to 8,000 mutual funds that you could invest in. This allows for a lot of comparison shopping. If you find a fund you like, but the fees it charges are too high, you can easily move along and find a similar mutual fund with lower fees. After all, with close to 8,000 funds to choose from, you are bound to find a similar fund to invest in.
These are 6 of the biggest advantages of mutual funds. Some are more advantageous than others, but all together, they make investing in mutual funds a smart thing to do with your money. Before you run off and start investing in mutual funds, make sure you have a basic understanding of how they work in general. Doing your homework ahead of time will save you many headaches down the road. Also, be sure to choose a broker that will let you trade mutual funds with no fee. You can find some great options in my online broker comparison chart.
If you want to learn more about investing, consider reading my eBook, 7 Investing Steps That Will Make You Wealthy. Along with the book, you will get a free report of index mutual funds and ETFs to consider investing in and a free portfolio analysis.