Secondary Nav - EN

Social Menu (Header Primary)

Benefits of a Mutual Fund

Mutual funds are a popular investment vehicle for many investors. For people with limited investment knowledge, time or money, mutual funds can provide simplicity and other benefits. To help you decide whether mutual funds are best for you, here are a few key reasons to consider investing in mutual funds.

Diversification

One basic rule of investing, for both large and small investors, is asset diversification. Diversification involves mixing different types of investments within a portfolio. It’s used to manage risk. For example, choosing to buy stocks from the retail sector and offsetting them with stocks from the industrial sector can reduce a negative performance from any one security on your entire portfolio. To achieve a truly diversified portfolio, you may have to buy stocks with different market capitalizations from different industries and bonds with varying maturities.

By purchasing mutual funds, you enjoy the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. One caveat, however, is that simply purchasing one mutual fund might not give you adequate diversification. It's important to check if the fund is sector- or industry-specific. For example, investing only in an oil and energy mutual fund might spread your money over 50 companies, but if energy prices decline, your portfolio will likely suffer.

Economies of Scale

The easiest way to understand economies of scale is to think about volume discounts. The more you buy of one product the cheaper that product becomes. For example, when you buy a dozen donuts, the price per donut is usually cheaper than buying a single one. The same principle applies in the purchase and sale of securities. If you buy only one security at a time, the transaction fees will be relatively large.

Mutual funds take advantage of their buying and selling volume to reduce transaction costs for investors. When you buy a mutual fund, you diversify without the numerous commission charges. Imagine if you had to buy each of the 10-20 stocks needed for diversification individually. The commission charges alone would use a good chunk of your investment. Take into account additional transaction fees for every time you want to modify your portfolio, and Investment costs can add up. With mutual funds, you can make transactions on a much larger scale for less money.

Affordability

Many investors don't have the exact sums of money to buy many securities. One-hundred or two-hundred dollars is usually not enough to buy stocks or bonds, especially after including commissions. Investors can purchase mutual funds in smaller denominations, ranging from $100 to $1,000 minimums. Smaller denominations of mutual funds provide mutual fund investors with the ability to make periodic investments through monthly purchase plans while taking advantage of dollar-cost averaging. Rather than waiting for enough money to buy higher-cost investments, you can invest right away with mutual funds. This provides an additional advantage - liquidity.

Liquidity

Another advantage of mutual funds is the ability to buy and sell with relative ease. In general, you are able to sell your mutual funds in a short period of time without much difference between the sale price and the most current market value. However, it’s  important to watch for any fees associated with selling, including back-end load fees. Also, unlike stocks and exchange-traded funds (ETFs), which trade any time during stock market hours, mutual funds transact only once per day after the fund's net asset value (NAV) is determined when stock markets close.

Professional Management

When you buy a mutual fund, you also choose a professional money manager. The manager uses the money you invest to buy and sell stocks that he or she has carefully researched. Rather than you having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund's money manager handle it for you.

Highly Regulated

There is no protection against potential investment losses that occur due to market risk. However, in accordance with provincial laws, a mutual fund’s assets belong to the fund and its unitholders, not to the mutual fund company or portfolio manager who is  responsible for administrative and portfolio investment decisions. In addition, a Canadian chartered bank or trust company, which is protected under banking and trust laws, acts as custodian for holding the fund’s assets.

Since the assets of the mutual fund are isolated from those of the fund’s trustee, manager and custodian, they are not available for any use or purpose other than the investment objectives of the mutual fund.

The Bottom Line

As with any investment, there are risks involved with buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Also, the advantages gained from mutual funds are not free: many of them carry costs through sales charges, annual expense fees and penalties for early withdrawal.

© Copyright 2018 Starlight Investments Capital LP. All Rights Reserved.

Social Menu (OffCanva)

Secondary Menu - EN (OffCanvas)

Language switcher - offcanvas