Why a Mutual Fund Investment Is Better than Owning Individual Stocks

Owning a mutual fund allows the average investor an opportunity to invest in stocks at a reasonable cost. Many people do not invest in stocks because the cost to buy and sell a small quantity of stock can eliminate a significant portion or all of the potential profit. For example, 10 shares of a stock trading for $10 would cost $100. If the purchase transaction required a $10 charge, you would need a 10 percent return just to break even. Keep in mind that an investor would also pay a fee to sell the stock. If another $10 fee were charged to sell back the stock, it would take a 20 percent gain to break even in this case. The cost associated with buying and selling stock can prevent small investors from participating in the above-average returns available in the stock market. Investing in a mutual fund can address this issue for the average investors.

Responsible Investing: Diversification

Most experts agree that diversification is a key to managing risk in the stock market. At any given time, a company can experience financial, industrial or market difficulties. However, it is unlikely that several companies in different industries will experience the same challenges at the same time. Investing in a variety of stocks decreases the chances that you will see significant losses. It is not unusual for one sector of the market to underperform while another sector is overperforming. Therefore, a responsible investment strategy is to diversify. This can mean owning a portfolio of stocks in different industries rather than just one or two.

Responsible Investing: Wisdom to Know When

Responsible investing also means buying and selling at the appropriate times. At various times, a stock may trade at a cheap price. This creates a buying opportunity. However, an investor may need to sell a stock if its value has significantly declined in order to avoid further losses. A significant increase in price might be a reason to sell as well. Before the stock decreases in value again, the strategy is to cash in and take the profits. Therefore, the cost associated with managing and maintaining a small portfolio of individual stocks may outweigh the benefits.

The Mutual Fund Alternative

Mutual funds provide a cost-effective way for smaller investors to participate in the stock market. A mutual fund is an investment company that pools money from a large number of individual investors. The company hires professionals who manage the fund. Each fund has an objective and set criteria for the types of securities that will be included. The large sum of money allows the fund to purchase a diversified portfolio of investments. Therefore, each share of the fund represents a wide range of investments. Typically, the minimum investment is set at a level most average investors can afford. The most common minimums range between $1,000 and $2,000. A key advantage of mutual funds is that the operating cost of the fund is shared by all of the purchasers of the fund. The costs of buying, selling and professional management are included in the price of the fund. Therefore, the investor who cannot afford to own a diversified portfolio of individual stocks may be able to afford to share in a mutual fund. Mutual funds provide a way for a smaller investor to have a diversified investment in stocks at a reasonable cost.

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