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Mutual funds provide professional management of your cash. These managers have the training and resources to stay abreast of and adjust to market alterations. Regrettably, fund managers don’t have a crystal ball presenting them the ability to foresee the future; don’t expect your manager to keep you totally out of harm’s way.
Fund managers are demanded by law to select and manage fund holdings in accordance with the fund’s investment objectives and policies, as described in the fund’s prospectus. These objectives might be designed to minimize your risk.
Diversification: dispersing the risk
Mutual funds help do away with some of the risk involved in investing in individual stocks and bonds by giving you shares in a lot of different assets. Remember Enron or MCI? How did that work out for employees who based their futures on company stock? Mutual funds likewise bring down your cost of diversifying by sharing transaction costs with additional shareholders.
Although each mutual fund purchases many securities, the funds themselves come in a wide assortment of styles and classifications. Some mutual funds specialize in growth, some in worth. Some invest in U.S. markets, others in foreign markets. A few invest only in bonds, others in a blend of stocks and bonds. A well-diversified portfolio invests across many styles and sorts of mutual funds.
Read the prospectus summary and annual report. Occasionally the titles of mutual funds may be misleading. A fund with the word growth in its title doesn’t have to be totally invested in growth stocks. Likewise, your mutual fund manager’s investment style may drift, particularly in turbulent markets.
The convenience of mutual funds starts with the initial buy and continues with investments, withdrawals, reinvestment of dividends and capital gains, record keeping, and tax reporting. Mutual funds make it simple and inexpensive to dollar-cost average (invest regular sums of money at regular intervals). This strategy is particularly beneficial when markets are extremely volatile — you wind up purchasing more shares when costs are low. You are able to generally find everything you need to read, see, or do at a fund’s site; otherwise, call the fund company.
Marketability means you are able to easily purchase or sell mutual fund shares. Unlike owning a home, you might be able to quickly exchange shares in a mutual fund for a different investment or cash. Marketability gives you the flexibility to produce and maintain a diversified portfolio.
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