Stock Mutual Funds
Stock mutual funds are like a middleman between you and stocks(also known as equity mutual funds): they pool shareholder money and invest it in a number of different companies. You can buy several stocks in a single transaction through a mutual fund instead of picking and choosing individual stocks yourself to build a portfolio.
Stock mutual funds are like a middleman between you and stocks(also known as equity mutual funds): they pool shareholder money and invest it in a number of different companies. You can buy several stocks in a single transaction through a mutual fund instead of picking and choosing individual stocks yourself to build a portfolio.
It makes mutual funds perfect for investors who don't want to spend much time studying and handling an individual stock portfolio — a mutual fund works for you. A simple portfolio of investments may include as few as two mutual funds.
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But the key to the argument of the mutual fund is that there are several types of mutual funds: active fund managed by a professional manager; index funds tracking a benchmark index such as the Standard and Poor's 500; and ETFs, which are a category of index funds — they typically track an index, but are traded as stocks throughout the day.
➢ How do fees impact returns?
Were big fans of index funds and ETFs about actively managed mutual funds, and that's why: while the professional managers behind active funds aim to beat the market, they rarely do it, especially when you're adjusting for fees. And as you can imagine, it comes with higher fees to a fund that employs a professional manager. Tracking a benchmark with an index fund or ETF, along with diversification and lower fees, offers an excellent shot at strong long-term returns on investment.
Keep in mind that mutual funds aren't entirely hands-off: you still need to stay on top of your portfolio — you may want to periodically rebalance, check fees, and make sure you're still investing at the appropriate level of risk.
If you don't want to do that, you could be a good candidate for a robo-advisor, online portfolio management services that invest for their customers and rebalance portfolios as needed. These companies invest in ETFs in general.
Simply put, a stock fund is a form of mutual fund invested primarily in publicly traded companies' individual stocks. For example, when you buy a fund holding GE, Microsoft, Procter & Gamble, and Dell's stocks, then you own a stock fund. Some stock mutual funds also hold bonds and cash but stock funds will typically allocate at least 80% of the portfolio assets to stocks.
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The Pros of Investing
● Diversification: The first advantage of a stock fund, and some would say the most important aspect is that you can invest in a single stock fund and have immediate access to hundreds of individual stocks. This diversification will reduce "company- specific risk" (the inherent risk of buying just one or a couple of stocks).
● Diversification: The first advantage of a stock fund, and some would say the most important aspect is that you can invest in a single stock fund and have immediate access to hundreds of individual stocks. This diversification will reduce "company- specific risk" (the inherent risk of buying just one or a couple of stocks).
● Professional Money Management: Investing in individual stocks takes a considerable amount of time, not just resources. By contrast, stock fund managers and analysts wake up every morning to dedicate their professional lives to researching and analyzing existing and potential holdings for their stock fund.
● Systematic Investing and Withdrawals: Investing in a stock fund on a regular basis is simple. Many mutual fund firms allow investors to directly invest as little as $50 a month in the stock fund without incurring a transaction fee. This is known as the systematic Investment Plan (SIP). It is possible to pull money directly from a bank account and invest directly in the stock fund. On the other hand, money can be withdrawn from a stock fund on a regular basis and deposited in a bank account. Generally there are no charges for this product.
The Cons of Investing
● Lack of Ownership:
Investors who prefer to purchase individual stocks as opposed to a
stock fund are often quoted as giving up ownership rights in a stock
fund. They refer to the fact that you own the stock fund and not the
individual stocks within the stock fund if you buy a stock fund. If you
prefer to own a piece of GE and have voting rights in the company
(although a very small stake in general), then buy the stock.
● Costs: In the case of a stock fund, you are going to pay for the ongoing stock fund management. You pay to buy the stock if you buy an individual stock, but you do not pay another fee until you sell the stock. Stock funds can charge fees, called loads, like other types of mutual funds. These fees can be charged on each purchase or on the fund's sale. Mutual funds also have ongoing fees derived from the returns of the fund. These costs are expressed in the form of a ratio of expenses, a percentage of assets.
● Choice Overload: Too many choices can be an issue at times. When you decide to buy a stock fund, more stock funds to choose from than individual stock trading on the New York Stock Exchange will be found, strange as it may sound. Be prepared to spend time and resources to search and manage your portfolio through the variety of stock funds.
Weighing the Pros and Cons of a Stock Fund
It's important to weigh each pro and con of owning a stock fund prior to making a decision to invest. In many cases, what one investor might see as a pro, another investor might see as a con (and vice versa). Most investors would benefit from understanding more about the pros and cons of stocks funds and how to avoid the pitfalls.
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