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