Mutual Funds

Are These Your Top 4 Reasons For Buying Mutual Funds?

By Kanwal Sarai
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online investing course 4Most people invest in mutual funds, but do mutual funds make good investments? Could you be wasting thousands of dollars of your hard earned money? Mutual funds are a popular investment tool made up of a pool of money combined by individual investors, organizations and companies.  A manager invests and oversees the cash the collective group has placed into the mutual fund. Mutual funds are not insured by any federal agency, which means that the value could fall, and you may end up selling them for less than you paid. In this article we’ll examine why many people choose mutual funds… and why mutual funds may not be your best bet for improving your portfolio.

1. History

A good majority of people may have received a cursory knowledge of investing through their parents or their grandparents, who probably invested in inexpensive real estate, or low-yield investments like savings bonds. Others may have entered the workforce with little to no knowledge, and were forced to rely on the recommendation of their Human Resources manager who briefly explained the benefits of mutual funds because it simplified the amount of information necessary for new hires to complete their intake paperwork. The lingering debate over the benefits – or downfalls – of mutual funds can take many off guard. 

2. Education

In researching the subject, savvy consumers may find themselves questioning investing in mutual funds, if only because of the high percentage of fees charged. All mutual funds charge annual fees, which reduce the funds’ performance – meaning less of a return for you, the investor. Without knowing that there are fees involved, many new investors don’t even realize they are actually losing money each year.

3. Busy Lifestyles

Three reasons consumers might accept a mutual fund investment, rather than investigating alternatives include:

a. Not knowing what a mutual fund is, as compared to value investing.
b. Not knowing the benchmarks to compare a mutual fund to – or which types of investments a mutual fund owns.
c. Not realizing that there are less risky alternatives.

4. Consumerism

Faced with a choice, but lacking time and education with which a strong decision might be made, would-be investors may be apt to follow along with the crowd. Turn on the television on any given day, and an array of investment options are presented via commercial slots. Even the Super Bowl half-time show has become a showcase for short infomercials on investments and stock trading. Following the crowd is less than optimal – especially in light of the fact that many working adults are still seeking knowledge about how to invest for retirement, and how to build a portfolio.

The Bottom Line
Here are a few facts about mutual funds that your financial planner may not want you to know:

  • Fees are charged on every mutual fund annually, regardless of how well the fund is – or is not – performing. These fees reduce your gains, and this loss adds up over time.
  • If a large number of mutual fund holders sell their funds in a short period of time, a mutual fund will drop in price – especially during an economic downturn, if the fund manager is forced to sell – even though some of the stock holdings might still be worth keeping.
  • Most Stock Brokers operate under the Suitability Standard, which means that the securities they recommend must be suitable for your personal financial situation, given your financial profile at the time. This also means that many of the investment options they promote could be less than suitable for your purposes… but they won’t be punished for selling you a poor investment option that makes them a bunch of money.

The Solution
Paying fewer fees means greater profit - and a higher return on your hard-earned money. Many wise consumers choose to gain knowledge about investing on their own, because they recognize the fact: no one has a greater vested interest in seeing their earnings gain momentum, and their finances grow. Building a solid portfolio based around the principles of value investing is by far the smartest decision that can be made – and it all starts with your investment education.

Keep in mind: knowledge is power… and learning to invest on your own really isn’t that difficult to do. The concept of value investing is one which can see your money grow – even through the toughest of times.

About the author

Formerly a corporate eMedia Executive, Lisa Kling is a marketing analyst and social media strategist. She is a   Featured Contributor in Business & Finance on the Yahoo! network, and studied journalism and marketing at Colorado State University and the University of Texas, San Antonio.

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Kanwal Sarai

With more than 27 years of investing experience and a passion for investing and teaching, I demystify the world of investing. My goal is to help you grow your net worth by investing in quality dividend paying stocks. Build your own stream of increasing income today.

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