My first job after college was working for a mutual fund company. Unfortunately, I was answering questions with a science and psychology degree.
Now, as an experienced financial planner knowledgeable about the pros and cons of mutuals, I can provide more detailed help.
- Most people do not have millions or even thousands to invest.
- Mutual funds allow the average person to purchase a wide variety of securities at affordable prices.
Low Initial Investment
- Many mutual funds have an initial investment requirement of $2,000 or $3,000.
- This can be even lower if establishing an Individual Retirement Account (IRA) or Roth IRA and set up automatic purchases.
- A one stock mutual fund, for example, could hold 30 to over 500 stocks depending on the type of fund.
- It’s a good way to buy a variety of stocks for potentially lower cost.
- Mutual funds exist for most investment purposes like municipal bonds only, treasuries only or only large or international stocks.
- You can even buy mutual funds that provide a mixture of bonds and stocks.
- Mutual funds offer great convenience, in most cases, in the ability to request a distribution of funds.
- There are normally a few days for settlement, then funds can be received quickly whereas many other types of investments have limits and timeframes for trading and selling.
I am a big believer in mutual funds and all that they have to offer, but for those with limited knowledge trying to figure out whether to purchase a mutual fund, there are some cons.
- Before purchasing, learn what share class is best for you because share class determines the fee or expense. Most but not all mutual funds have a share class.
- All mutual funds have an expense ratio — expressed as a percent of your total balance. For example, if an expense ratio is 1.12 percent, and you invested $5,000, your annual fee on a $5,000 balance would be $56.
Not always easy to compare
- It can be difficult to compare funds that you think are similar.
- Maybe two funds buy large companies, but one has a conservative approach and one is aggressive.
- As another example, some large company mutual funds only buy the “mega” companies with values of $30 billion and up; whereas, other large company funds focus on $10 to $30 billion.
Too Many Choices
- Too much to choose from can become overwhelming.
- It’s best to have a general idea of what you want to invest in, and look only in those mutual fund categories.
A great place to learn more about mutual funds is the Mutual Fund Education Alliance.
Yahoo also has a great resource that pulls basic mutual fund education from difference resources and lists them for you.