Mutual Fund

Mutual Funds are a Great Way to Invest!

One tenet of investing wisdom is diversifying your portfolio. Putting a bit into different pots should keep me from large losses while keeping the ability to generate passive income for my family.

That’s why I’ve decided to only put a little bit of my inheritance with a peer to peer (P2P) lender at this time. Despite it’s potential as a high yield investment, it’s still an unproven asset class. I still need to find another investment option for the remainder of my funds.

Investing and Life Priorities

I also need to factor in my life priorities to my investment selection. Any investment idea that’s time-intensive won’t realistically work for me. I’m a single working mother and that means I value the free time I have.

Here’s what I’ve found so far. I’ve learned that I don’t want to invest in a time-consuming business like a mall kiosk—even though I love the goods and wish I could enjoy all the friendships the current owner has with customers! I don’t want a large pricey asset like real estate. I’ll need to take out a mortgage, concentrate my investment risk and spend time managing the property. I also can’t imagine putting my money into something I don’t really understand, like a website business.

The idea of owning financial assets like my parents makes a lot of sense but, given my time constraints and need to bone up on how to evaluate stocks or forex pairs, I don’t think that active is right for me either. However, a doctor friend mentioned to me that, “You can get all of the benefits of stock trading and investing without a lot of the leg work by investing in mutual funds.” I trust this woman. In addition to being a good doctor, she’s successful but financially conservative, smart and seems to have her life together.

Pros of Mutual Funds

Here are some of the advantages of mutual funds she mentioned to me.

  • I don’t need to manage the portfolio of financial assets once I choose what’s right for me. Mutual funds often have a professional asset manager or two to do that for me. I pay the manager a small fee out of funds invested.
  • I won’t need to check my stocks or forex pairs while I’m at work.
  • I can (and will) choose mutual funds that are conservative. A stable income fund managed by a large investment manager should work well for me.
  • Unlike P2P loans, mutual funds are a long-established asset class. The first modern mutual fund was started in 1924, so the necessary legal framework and fund infrastructure have been developed and refined. Billions invested in mutual funds have survived financial downturns. I like that.
  • Today, there are almost 80,000 mutual funds to choose from and more than 31 trillion is invested in mutual funds around the world! Lots to choose from.
  • People from all different walks of life use mutual funds to maintain and grow wealth over time.
  • Mutual funds also provide “instant” diversification for someone like me. I don’t need to pick stocks or try to figure out the best time to buy or how much to allocate to each stock. Buying a mutual fund means I buy into the manager’s portfolio.
  • Now, my intention is to leave the money I invest in financial assets in place for a good long time. But life happens. If I needed to get cashed up and had no other way to pay for an emergency, I might need to withdraw money from my investments. That’s another reason that mutual funds are a good fit for me. I can decide to invest more or withdraw money any time. I have liquidity and access to my money if I need it.

Mutual Fund Evaluation

It’s also relatively simple to check out the fund and fund management because mutual funds are highly regulated:

  • The mutual fund’s performance is documented over time, and it’s verifiable.
  • Mutual fund portfolio composition is also reported on a periodic basis.
  • That’s important because, as an investor, I want to know that the manager(s) are maintaining the kind of fund I originally purchased. I want to know that the manager hasn’t randomly changed strategy in search of bigger returns.

Mutual Fund Fees

In comparison to P2P lending, the cost of investing in mutual funds is relatively small. P2P lenders charge almost 2 percent and that’s especially a lot in today’s interest rate environment. Most mutual fund fees are just 0.50 to 1 percent!

If I choose an index fund—a mutual fund that mirrors a major index like the ASX 200—my fees can go as low as 0.11 percent.

Index Funds

Index funds are a real bargain! Since so many institutions and individuals buy index funds, pooling large amounts of money reduces managers’ fees and transaction costs. The manager doesn’t need to actively manage the portfolio, just choose one that mimics the given index.

Mutual Funds: Cons

Now, let’s consider some of the cons of investing in mutual funds.

  • Financial assets like mutual funds aren’t guaranteed and I could lose money if I needed to cash out when the broad market is in decline.
  • If the market is tanking or in free fall, I also can’t enter an intra-day sell order. With direct stock trading, I can sell any time during the trading day but I’d have to wait until the end of the trading day to liquidate my mutual funds.
  • Tax loss harvesting is a benefit I’d have as a self directed trader. It allows me to use realized trading loses to offset personal income and capital gains. However, with mutual fund investments, I also can’t decide when to take capital gains or losses.
  • From my research to date, it looks like many managers perform at less than the chosen benchmark for the fund. In other words, if the manager’s goal is to perform as well as the ASX 200 and, net of fees, the fund doesn’t do as well as the index, that’s not so good.

Conclusions

On the whole, mutual fund investing seems like a good investment opportunity for me. The benefits of investing in mutual funds seem to outweigh the disadvantages.

I think I’ll go ahead and gradually invest most of my capital in a number of different mutual funds. Naturally, I will make decisions about the mutual fund portfolio over time and allocate money to multiple funds. Now, the next step is to drill down into funds that make sense for our personal and financial situation. I’m excited!

What do you think? Do you invest in mutual funds? Please leave me comments, because your feedback is wonderful!

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