Investing can be a confusing process, especially for beginners. There are so many different types of investments that the sheer amount of information to wade through can be extremely overwhelming. With so much to learn, a lot of investors let frustration lead to poor decisions and negative returns.
A good way to get into investing is with mutual funds, but mutual funds are also great for investors of all skill levels. Let’s take a look at a five good reasons why you should consider investing in mutual funds, and look at a of couple mutual funds that you may want to consider adding to your portfolio.
1. Mutual Funds are Professionally Managed
Perhaps the best reason to invest in mutual funds is that they are professionally managed. This is particularly important for beginning investors since it takes the majority of the decision making out of their hands and puts the responsibility on experienced professionals that know how to best allocate the funds at their disposal. It is important to realize you are going to pay a fee for their services, and you should definitely pay attention to management fees when choosing between funds. Even with the management fees, mutual funds are a great way to play the market while still learning the ropes of investing.
2. Lower Capital Requirements
In most cases, when we start down the investing road we want to take it slow. This is not only wise, but also often necessary. Mutual funds allow you to get started with a relatively small amount of capital, with some allowing initial investments of as low as $50. This is great because you can select a fund and add a few dollars each month as you are able. This is a very attractive way for beginners to use mutual funds because there are few other ways to diversify such a small amount of starting capital.
3. Lower Risk than Investing in Individual Stocks
Mutual funds, by their basic nature, are safer than investing in individual stocks. This is because mutual funds invest their capital across a basket of stocks as opposed to just one or two securities. Diversity is one of the most effective ways to protect your money and mutual funds are an excellent way to accomplish this. You can select a mutual fund that invests in large cap stocks or perhaps one that selects just small cap stocks… the possibilities are endless. The downside to being so widely diversified is that you will typically not see huge upward spikes in your investment, but the safety of knowing that you will also avoid big downside hits is well worth it.
4. Vast Number of Choices
Once you make the decision to look at mutual funds, you will find thousands of different funds to select from. There are funds built around just about any type of stock, and every possible industry. If you are feeling confident in oil stocks, you can find mutual funds that focus solely on oil companies. If you want stocks that encompass every sector of the economy, you can go with funds that focus on all the large cap stocks, regardless of what industry they are in. There are also mutual funds that take into account the ethical restrictions that some investors have, such as abortion, smoking or gambling companies. Regardless of what industry or stock type you wish to invest in, there is mutual fund that will cater to your needs.
5. Portfolio Reshuffling
This goes hand in hand with our first reason, professional management. By portfolio reshuffling, we mean that on any given day, the mutual funds manager can exit positions that they believe should no longer be in the fund, or open new positions in companies that they believe will benefit the fund’s growth. The constant day-to-day monitoring is something that most investors are unable to do on their own. Most of us have jobs where we are not able to sit in front of our computers monitoring the market all day long, so it is impossible to be on top of every trade that we need to make. This is not the case with mutual funds. Once in the fund you know that your positions are constantly being monitored and adjusted as needed.
If you are interested in mutual funds, take a look at the following mutual funds, which are among the top performing funds so far in 2012:
- Hartford Growth Opportunities (HGOAX) – A large cap mutual fund that focuses on growth stocks and is up 23.5% so far this year.
- T. Rowe Price Health Sciences (PRHSX) – A mutual fund that focuses on the healthcare industry, which is up 31.7% this year.
- Third Avenue Real Estate Value Investor (TVRVX) – This mutual fund invests in real estate stocks, and as a result of the strong year homebuilders have enjoyed, this mutual fund is currently up 31.5% in 2012.