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Mutuals

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Should you invest in mutual funds or individual stocks?

Mutual Funds are better investment vehicles than investing in individual stock because mutual funds give the individual investor the most important element in managing a portfolio, risk management through diversification. Buying shares of a mutual fund means buying an interest in all the securities which the Fund holds. Mutual Funds hold hundreds of individual securities so holding shares of a mutual fund gives the investor a lower cost way to diversify their portfolio over buying individual securities.

In addition, the funds have portfolio managers that manage the Fund on a day to day basis. This is a very time consuming process and time is what most investors with individual securities do not have. The successful portfolio managers have teams of research analysts that recommend securities and analyze financial statements and industry position. They visit the company and talk to the CEO and CFO.
Most investors in individual stocks cannot match the time, expertise and expense that a mutual fund provides.
There are thousands of mutual funds to select from. A fact that often confuses the individual investor. So how can an individual investor decide to make the best choice for the highest possible return? There are several factors as follows:
1. What does the Fund invest in? Mutual Funds can be invested in many types of securities, a Balanced Fund usually has a mixture of stock and bonds. The Value Fund has securities that are under priced when viewed from a historical perspective. The Growth Fund holds securities that are positioned to increase earnings and sometimes these securities have high expectations already priced into their price which can increase the risk.
There are also different grades of bond funds and sector funds that an investor can choose from. So, if the investor chooses to invest in several different types of mutual funds, the investment leads to even more leveraged diversification and thus further reduces risk from holding individual securities.
2. Who is the Portfolio Manager and how has the fund Performed? Several firms like Morningstar rate mutual funds performance (return) on a one year, three year and five year basis. They can give the company a rating usually between one and five star (with five star being the highest rating.) When you buy a mutual fund you are buying the expertise of the portfolio management. It is important that you research how long that management has been in place

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