| There are vast differences between large | | | | large fund can afford to pay the salaries of a |
| investment companies and the smaller ones in | | | | competent portfolio manager and research |
| terms of fund size, return performance and the | | | | deputies. Aside from the sales charge, most of |
| management team. How stock investors could | | | | the expense incurred in a typical investment |
| benefit from investing through a large stock | | | | company is the fee paid to the group responsible |
| mutual fund? Just to name 3 key advantages | | | | for keeping the fund invested. Usually this fee is |
| here for investors' reference. | | | | fixed at a rate equivalent to 0.5 to 1 per cent of |
| 1. Lower Expenses for Diversification | | | | the fund's assets each year. Suppose a fund's |
| The more obvious advantage of an investment | | | | capital is a mere $500 million; 0.5 per cent of this |
| fund rests on the mere fact that it has much | | | | is $2.5 million, which the fund can pay for its |
| more capital than any but a few individuals own. It | | | | investment managers, assistants, and operations |
| can diversify into a reasonable number of stocks | | | | expenses. A fund far smaller than this may be |
| with reduced percentage of expenses over your | | | | able to hire a skilled manager, because he expects |
| total investment sum. | | | | a rapid growth of the fund's assets, and |
| An investor wanting to reduce the gamble in | | | | consequently of his management fee. Or the |
| owning common stock must hold stock in a good | | | | same management organization may be in charge |
| many companies. Momentarily ignoring the | | | | of more than one fund, with some of the assets |
| existence of investment companies, suppose a | | | | of each fund invested in stock of the same |
| man decides that for adequate diversification he | | | | companies, thus reducing the work for each fund. |
| should own stock in fifty companies, and for the | | | | It appears that in 2005 the investment companies |
| companies he selects the average price per share | | | | with the best performance records are apt to |
| is $30. Conceivably he could buy ten shares in | | | | have total assets of at least $300 Billion either in |
| each company at a total cost of $15,000, plus at | | | | one fund or in a group of funds under the same |
| least $3,000 expenses. | | | | management. |
| In return for his money, the first things he gets | | | | 3. Fund Maturity and Track Records |
| back are fifty stock certificates, which he must | | | | Large size also implies maturity. It is practically |
| keep safe. When he sells a certificate at any time | | | | impossible for a fresh investment company to |
| in the future Uncle Sam requires that he know | | | | accumulate $3 billion of assets, let alone 100 times |
| when he bought it and the cost. Also, in the | | | | that much, until either the fund has been in |
| course of a year he will receive some 200 | | | | existence for a good many years, or else its |
| dividend checks, for a total of perhaps $60. The | | | | management group has an established reputation |
| whole thing sounds silly, doesn't it? | | | | strong enough to draw capital rapidly into a new |
| This example suggests three negative points | | | | fund. In 2005 most of the funds, or groups of |
| about an investor's obtaining diversification without | | | | funds, with $300 million assets or more, are at |
| using an investment company: | | | | least twenty-five years old. So a fund with a |
| (A) He must pay out at least a few thousand | | | | good performance record is apt to have age as |
| dollars, and not many investors start with that | | | | well as size. The giant of the industry Fidelity |
| amount of money. | | | | Investments was founded around 1930 by |
| (B) The expenses incurred in making small, direct | | | | Edward Johnson II. |
| purchases of stock may be higher than on the | | | | These comments on size may cause a reader to |
| same total amount bought through an investment | | | | wonder: "How does a new investment company |
| company, especially if a buyer figures in the fees | | | | get started?" One answer is that many investors |
| for later sale of the stock. | | | | are so careless that a salesman with colorful |
| (C) Even if an investor has capital enough to buy | | | | prospectus can sell them shares in a fund with |
| many times 10 shares in each of fifty or more | | | | neither size, age, nor reputation. Or a buyer |
| companies, he still takes on a lot of work in | | | | inclined to gamble may want to "get in on the |
| selecting and keeping track of so many | | | | ground floor," whatever that means. |
| companies, and in handling his certificates and | | | | Of course, a fund can be large and still have poor |
| dividends. | | | | or mediocre management. Large size merely |
| 2. Professional Investment Manager | | | | gives a fund its perceived stability and the |
| Another advantage of having considerable capital | | | | opportunity for a fine performance. |
| in one pool under an investment fund is that a | | | | |