| Though it cannot be said in general that | | | | risks of stock trading by spreading out |
| mutual funds are always better than | | | | the capital over many stocks. But |
| individual stocks, it still cannot be | | | | over-diversification is again a bad |
| denied that they usually involve lower | | | | thing. First, an investor gets into many |
| risks, less money and generally yield | | | | funds that have significant mutual |
| lower but safe returns. It all depends | | | | implications, thereby losing out on the |
| on the risk attitude of the investor. | | | | full benefits of risk stretching that |
| This is understood clearly by looking at | | | | diversification affords. Secondly, |
| the disclaimer attached with any mutual | | | | over-diversification may decrease your |
| fund options that are nearly identical | | | | overall return. By hitting too many poor |
| with that applicable to any other (kind | | | | through mediocre funds, the investor |
| of) stock. They have their advantages | | | | reduces the return by missing the |
| and loopholes like any other form of | | | | potential of a few well-managed funds. |
| investment. And as in other forms of | | | | It is true that mutual funds play it |
| investment, one has to be fully aware of | | | | safe. This is because mutual funds are |
| potential pitfalls and while driving | | | | actively organized by a professional |
| high with mutual funds, has to be alert | | | | money manager who keeps constant checks |
| enough to avoid them. Mutual funds are | | | | on the stocks and bonds in the fund's |
| seemingly the easiest and least | | | | portfolio. As this is her/his primary |
| stressful way to invest in the stock | | | | occupation, s/he can devote much more |
| market. Quite a large amount of new | | | | time to choosing investments than an |
| money has been put into mutual funds | | | | individual investor. This provides the |
| during the past few years. Briefly put, | | | | investor with the peace of mind that |
| a mutual fund is a pool of money | | | | comes with informed investing without |
| contributed to by individual investors, | | | | the stress of analyzing financial |
| companies, and other organizations. | | | | statements or calculating financial |
| There will be a fund manager hired to | | | | ratios. But on the negative side, a |
| invest this cash with a primary goal | | | | mutual fund, unless open-ended, must |
| that depends upon the type of fund. The | | | | remain confined within a fixed |
| manger usually diversifies in a manner | | | | portfolio. Even with open ended mutual |
| such that the net average earning is | | | | funds, the range of potential is often |
| expected to be considerably positive. S | | | | low as compared to what is available to |
| he may be a fixed-income fund manager. | | | | an investor free to choose any stock s |
| In that case s/he would work hard to | | | | he likes. Besides, mutual funds some |
| provide the highest return at the lowest | | | | times come as load funds in which the |
| risk. On the other hand a long-term | | | | investor has to pay the sales commission |
| growth manager should try at least to | | | | on top of the net asset value of the |
| beat the Dow Jones Industrial Average or | | | | fund's shares. Also, the dollar-cost |
| the S&P 500 in a given fiscal year. But | | | | averaging strategy is just the same with |
| that is what any successful investor | | | | mutual funds as to any common stock. Of |
| attempts to do, and anyone with a | | | | course, fixing such a plan can |
| similar approach can be expected to make | | | | substantially reduce your long-term |
| the same earnings. It all depends really | | | | market risk and result in a higher net |
| on the overall investment climate and | | | | worth over a period of ten years or |
| the sectors in which funds are flowing | | | | more. Hence considering the stress, |
| in. Diversification is definitely a good | | | | agony and risk that any stock may |
| approach when it comes to successful | | | | involve, mutual funds look a shade |
| investing by a reasonable investor. But | | | | better than independent trading, if low |
| with mutual funds, there is that the | | | | but steady is ok for you. Article |
| controllers may over-diversify. | | | | Written By J. |
| Diversification minimizes the inherent | | | | |