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