We've all heard that investing in a mutual fund is better than trying to pick stocks on your own. First of all, mutual funds hire professional analysts who are experts in the market and have spent a lot of time learning about the different stocks. Unless you want to spend a lot of your free time reading financial reports, you probably won't have as much information as a mutual fund manager does when making a decision.
Then there's diversification, which has been shown to be a good thing. Having investments that don't go together lowers risk. Simply put, some go up and some go down, and when you add them together, the return evens out the changes, or risk.
Lastly, a mutual fund lets smaller investors invest in small amounts instead of having to save up a lot of money to buy 100 shares of stock.
With all of these benefits, it's easy to see why mutual funds have become such a popular way to invest. Now, there are thousands of mutual funds from which to choose. How does one choose? Here are some suggestions:
- Don't let yourself be tempted to buy the best fund that has done well recently. It might seem like the smart and safe thing to do, but just like with individual stocks, you want to buy low and sell high, not buy high and hope for more growth.
Even good funds might not be able to beat the power of the market as a whole. You should look for funds that can do better than the market as a whole without putting you at more risk. Each fund must stick to a set of rules about how much risk it can take. Closely read the prospectus to find out what these are.
- Funds that get too big and too popular tend to lose their edge. This is true for more than one reason.
- Don't buy too many different funds. Diversifying into many mutual funds won't make a big difference in your risk or return unless your goal is to get the same returns as the market as a whole.
You can find more helpful information about mutual funds at www.best-mutual-fund.info.
One last thing to remember is that the type of fund you choose will depend entirely on what you want to do with your money. There are funds that are made to help you reach your goals, such as retirement, income, growth, paying for your kids' college, etc.
