| As the economy begins to pick up, more and | | | | issued by the most credit worthy firms such as |
| more people begin to consider equities to get a | | | | IBM and are relatively not very risky) are only |
| higher return on their money. After knowing | | | | sold in large denominations such as in excess of |
| today that stock values have trended upwards | | | | $100,000; investing in a mutual fund allows the |
| with significant gains after they hit rock bottom | | | | average investor to access those securities. |
| about a little more than a year ago with the credit | | | | The average investor usually doesn't have enough |
| crunch, many people constantly say they should | | | | resources (capital) to hold so many positions, and |
| have purchased stocks. The truth is, no one could | | | | if they did, they would continuously have to |
| have predicted the now apparent upward trend, | | | | monitor the portfolio for margin calls (the |
| or the price floor, and even a close estimate of | | | | requirement to add additional capital if positions |
| the time frame for the equities to rebound. | | | | lose value), and would have to consistently |
| The truth is that the average investor would not | | | | monitor the operations, industries, and markets of |
| bare the risk of putting all of their eggs in to one | | | | the invested firms. A mutual fund does all of that |
| basket, like purchasing Apple (NASDAQ:AAPL) | | | | for you, along with expert portfolio managers |
| shares in July 2009 when they were trading at | | | | that use highly complicated statistical models to |
| only $135 per share (though clearly a discount, still | | | | make more informed decisions that usually lead to |
| expensive), compared to $230 as at March 27, | | | | better returns. For example, Fidelity Investments |
| 2010. But that doesn't mean the small investor | | | | in December 2008 re-opened its Contrafund |
| can't benefit from the hot equities market today, | | | | mutual fund when it determined equities were |
| they could, by considering mutual funds. | | | | deeply undervalued during the financial crisis. |
| Mutual funds provide many benefits that are | | | | Mutual funds also have economies of scale. |
| often over looked, misunderstood, or not even | | | | Because of the massive pool of capital available |
| really known by the average investor. | | | | and invested, and the large number of |
| There are two types of risks in purchasing stock, | | | | transactions made, mutual funds pay less for |
| systematic risk and unsystematic risk. Systematic | | | | commissions and transaction costs. If you were |
| risk is simply the market risk, whereas | | | | holding 30 stocks and often made adjustments to |
| unsystematic risk is firm specific risk. By having a | | | | your positions, transaction costs could become a |
| small portfolio of less than 15 stocks, you are | | | | material cost, whereas you wouldn't have to |
| exposed to significant amounts of unsystematic | | | | worry about that with a mutual fund. |
| risk. The market does not provide a risk premium | | | | Remember when you are choosing a fund to buy |
| for unsystematic risk because it can be diversified | | | | into; you should consider whether it is industry or |
| away. By adding about 30 stocks to your | | | | sector specific, that way you can ensure |
| portfolio, much of the unsystematic risk | | | | diversification. For example, if a fund were |
| disappears; adding more stocks only marginally | | | | exclusively invested in airline stocks, a longer-term |
| reduces unsystematic risk, but usually about 30 | | | | price decline of crude would hurt the fund as the |
| stocks in a portfolio provides sufficient | | | | stock values would decline hence your return |
| diversification to serve as a hedge to | | | | would also decline. Sometimes, you must invest in |
| unsystematic risk. Since mutual funds are invested | | | | more than one fund, depending on your position |
| in many securities (often hundreds of stocks), | | | | as to where the market is heading and to ensure |
| you gain the added benefit of instant | | | | diversification. However, many funds ("hybrid |
| diversification, and optimal asset allocation, which | | | | mutual funds") have sufficient diversification since |
| instantly diversifies away unsystematic risk. | | | | they hold many diverse securities such as |
| Another added benefit of mutual funds related to | | | | risk-free treasury bills (T-bills), bonds, commercial |
| diversification is that many funds are invested in | | | | paper, money market securities, international |
| international securities, providing the added benefit | | | | assets, are invested in multiple industries, among |
| of letting the average investor access markets | | | | other less risky securities. In addition, you should |
| that are otherwise not accessible due to high | | | | consider a mutual fund that is non-loaded, has low |
| transaction and information costs (the mutual fund | | | | fees, and just choose a fund that fits your |
| would also allow the investor to circumvent legal | | | | investment horizon, and always read the |
| and institution barriers). Additionally, some | | | | prospectus. |
| securities such as commercial paper (securities | | | | |