Article
Use Mutual Funds to Grow Your Assets
For most people, mutual funds are
the best way to invest in the stock market. You, and several thousand others,
pool your funds. You may have only hundreds of dollars, but corporately you will
have millions, or even billions, of dollars available to invest. A fund manager
will take this money and develop a diversified portfolio of stocks, often
investing in more than 100 different companies. When you buy a share of the
mutual fund, you automatically own a fraction of every share of stock in that
fund.
The advantages of mutual funds for
the average investor:
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Professional management. A full-time
investment professional decides which stocks to buy, when to buy, and when to
sell. This benefit alone justifies the use of mutual funds for the majority of
investors. The typical fee received for managing a mutual fund is between .75%
and 1.5% annually. This is a bargain for what you get.
*
Diversification. When you invest in
a mutual fund, you are instantly diversified among what is often 100 stocks or
more. This increases the safety and the predictability of your investment.
Dollar
cost averaging. This is a disciplined method of regular investing, which can
reasonably be achieved only with mutual funds; not with
individual stocks. It consists of investing a set amount on a consistent basis.
In a fluctuating market, this technique normally will reduce the average cost of
your investment below the average price.
*
Cyclical gains and losses. With
mutual funds, because you are investing in several companies at the same time,
the gains or losses of one company are evened out by the performance of the
other stocks in the same fund. Had you invested in a single stock, the loss
could be large and permanent.
*
Purchasing of partial shares. You
cannot purchase partial shares of individual stocks. But mutual funds allow you
to invest exact dollar amounts because you can purchase partial shares. For
instance, if you want to invest $500 in a mutual fund, it may buy you 59.86
shares, only possible in mutual funds – not individual stocks.
*
Automatic reinvestment of dividends
and capital gains. You can instruct mutual fund companies to automatically
reinvest dividends and capital gains distributions at no cost when they are
paid. This allows you to purchase more shares of the mutual fund with the income
the fund generates, keeping all your money working for you all the time.
*
Automatic bank drafts. You can
instruct your mutual fund to automatically draft your bank account once a month
for a preauthorized investment amount. This
is convenient, and makes your investing automatic.
*
Liquidity/guaranteed redemption of
shares. By law, mutual funds are required to buy your shares back from you at
the closing market price on any business day in which you instruct them to do
so. This means you do not have to be concerned about being unable to fund a
buyer.
Scott Kays, CFP, is president and
founder of Kays Financial Advisory Corp., which manages more than $55 million
for more than 200 clients. He hosts investment seminars for major organizations
such as IBM, BellSouth, AT&T, and Cox Enterprises. He authors the KFAC
Market Newsletter on the economy and financial markets. He is also an ordained
minister and has been an associate pastor for five years. He lives in Atlanta
with his wife and four children.
www.crosswalk.com
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