Diversification advantage Mutual funds offer the investor the benefit of maximum diversification, with minimal exposure to any one stock. You pool your investment with the combined capital of other investors, which allows everyone to invest in many companies, not just focus on two or three larger stocks.
Fund managers usually diversify among at least 20 companies, investing no more than 10% of the fund’s total dollars into any one security.
Other advantages of mutual funds
• You can buy additional units of a mutual fund at any time.
• An automatic purchase plan called dollar-cost averaging (DCA) lets you invest equal amounts at regularly scheduled intervals. You buy more fund units when the prices are lower, fewer when prices are higher, thus averaging out the price of the units purchased.
• Mutual funds can be registered in RRSPs or RRIFs.
• Dividends, where applicable, are easily reinvested.
• Some fund companies allow transfers between their funds without charge.
• You can borrow against mutual fund assets (unless the contract is registered).
Here are several tips to contemplate prior to investing a mutual fund:
1. Eliminate the unreasonable desire for get-rich-quick profits. No one gets rich overnight after purchasing mutual funds. However, a lot of people may get rich investing in them over the long term (at least 5-10 years). Equity funds (those holding stocks) are affected by the stock market when the market is gaining, and when it is depreciating in value.
2. Identify your investment goals. Will you be saving for your child’s education over 15 years, or investing for retirement over 5, 10 or 20 years? Don’t buy a fund just because it has skyrocketed in value during any one period. Rather chose a fund most suitable for your investment purpose. For example: keep short-term investments liquid if you are putting money away for an emergency (it is advised to save three months income for costly emergencies). For this saving, you can use a money market fund, not an equity fund. For any longer period (5-10 years) consider using equity funds.
3. Invest in several types of funds. Don’t put all your money in one fund basket. Utilize several types: equity, balanced, bond, and money market funds for example. Create a well-rounded portfolio ensuring that it includes blue chip equity securities.
4. Maximize your tax savings. Register a mutual fund investment (to create an RRSP) if you do not yet own an RRSP. Contributions are tax deductible in relation to your taxable income, and the investments grow tax-deferred.
5. Position your fund investments. The best place for retirement investments that accrue interest or generate high returns is inside your RRSP because the income on these investments won’t be taxed year by year. Thus, you will gain the advantage of the full yield without the tax on interest-as-income. If you earn 5% and pay 40% in tax, you’ll only get 3.0% in a non-sheltered, non-registered investment (in the RRSP you’ll get the full 5%). Consider placing mutual funds that accrue capital gains and pay dividends over fewer taxable distributions, in a non-registered vehicle or a Tax-Free Savings Account (TFSA).
6. Invest in yourself first. The advantage of owning mutual funds is that you can establish a plan where the money is automatically taken out of your bank every week or month, and invested (by purchasing fund units). By doing this, you probably won’t miss this portion of your pay; try to invest 10-20% of your paycheck using this method.
7. Take investing seriously. Investing is that act of life whereby you put away today what you will need tomorrow.
The following advantages, make investing in mutual funds simple:
· Simplified investing You can select an industry or sector or country and/or currency within which a mutual fund trades securities. You do not have to to hand-pick each security. The mutual fund manager does this security selection process for you. You don’t have to be assessing which stock or bond may or may not be a winner. A fund manager is trained to weigh out all the market contingencies which can affect investor performance.
· Low-cost diversification A small monthly purchase plan can have you moving forward in your mutual fund investments in a day. Your money can buy a piece of many different investments held within one or more funds.
· Dollar-cost averaging Dollar-cost averaging allows you to buy more fund units when the unit values are down, less when they are high, giving you some benefit from downward volatility.
· Flexible access to your money You can sell your fund shares in one day. Your proceeds are available the next day if your money is needed in the short term.
· Portfolio balancing Choices include the full range of fund types, and strategies are available to use such as strategic balancing of your fund holdings.
· Automatically invest You can automatically invest more in mutual funds at any time or use dollar-cost-averaging.
· Professional management Mutual funds have active professional management watching over your investment.
Mutual funds offer investors a superior means of accumulating wealth through a broad range of investment solutions based on professional investment principles in a regulated environment.
There are eight benefits of Mutual Funds which the investor appreciates:
- Professional portfolio management
- Manage risk through diversification
- Opportunities for foreign and domestic investment
- Oversight by professional managers
- Low entry investment amount
- Solutions meet a wide range of needs
- Easy to buy and sell
- Convenient administration
The rapid growth in the investor confidence of using mutual funds escalated to over a half trillion dollars. This indicates the validity of using mutual funds in an investment portfolio.
A mutual fund is a pool of investments managed by an investment firm using a variety of instruments such as stocks, bonds, or government securities. When one purchases shares of a mutual fund, the investment firm (not the individual investor) is responsible for the day-to-day investment activity of the securities within that fund.
There are many funds to choose from.
There are a variety of different types of mutual funds available today, ranging from balanced funds, bond funds, blue chips, small caps, foreign funds, and more. Each mutual fund is very different in its make-up and philosophy, for instance some funds own hundreds of different securities, while others may own only a few dozen.
Mutual fund companies do not guarantee returns and investors need to be aware that there is the potential for negative portfolio or market performance that can lead to the loss of money in mutual fund investments. An investor should look for funds with objectives and risk levels that match those of his/her financial strategy.