Mutual funds offer many advantages to the individual investor. These advantages include: 1. Diversification 5. Dollar-cost-averaging 2. Professional Management 6. Liquidity 3. Low Cost 7. Family of Funds 4. Ease of Recordkeeping 8. Convenience ==================== 1. Diversification: "Don't put all your eggs in one basket." We have all heard these words many times. In investing this is certainly true. If you invest your nest egg in the stock of a single company and something unforeseen happens, i.e., the company goes bankrupt, new technology makes the companys' product obsolete, ect., you could wipe out your entire investment. A major attraction to mutual funds is the diversification they offer investors. A typical fund will have dozens, or more likely, hundreds of different securities in their portfolio. A poor performance by one of the companies in the portfolio will have much less of an effect on the total return and safety of your principal. Every dollar you have invested in a mutual fund has this diversification. 2. Professional Management: Professional management is another key attraction to mutual funds. The average investor just does not have the time or experience needed to make informed and profitable decisions. Fund managers perform extensive economic and financial research. They may visit hundreds of companies and talk with thousands of top business executives in a years time. They study balance sheets, trade publications, research reports, marketing reports and a myriad of other financial data. When you buy shares in a mutual fund you are getting this professional management for a relatively very low fee. The typical management fee of a mutual fund is 1/2 of 1% of that funds assets on a yearly basis. On a $5,000 investment, this is a yearly fee of $25.00. Professional money management has always been available to institutions and wealthy individuals. Now it is available to everyone through mutual funds. 3. Low Cost Even if you had the time, the experience, and the knowledge neccesary to profitably select your own stocks and the wherewithal to properly diversify, you cannot do it as cheaply as a mutual fund can. Even using discount brokers you will pay up to two percent or more in commissions - even more using a full service broker. You will pay again when you sell. Because they may buy millions of dollars worth of stock at a time, mutual funds are able to negotiate broker's fees to the bare minimum. Using no-load mutual funds there are no sales charges - 100% of your money is being invested for you. There are even funds which have no minimum initial investment or minimum subsequent investment - you can start investing with as little as $100.00 or even less! 4. Ease of Recordkeeping: Mutual funds handle all the paperwork and recordkeeping necessary to keep track of your investment transactions. They will mail your dividend checks promptly or reinvest them in additional shares (the choice is yours). They will provide accurate year-end summaries of all your transactions for income tax purposes. If you have any questions many are available 24 hours a day via a toll-free phone call. 5. Dollar Cost Averaging: If you fear you will invest in a mutual fund right before the market goes into a nosedive, you should consider dollar-cost-averaging. This is a technique of investing a set amount of money at regular intervals, monthly or quarterly, rather than a lump sum all at once. You invest the same amount of money regardless of whether the stock market is going up or down. In fact, this strategy will turn the ups and downs of the market into an advantage. Let's look at an example: Suppose you will have $100.00 available to invest for each of the next four months. You are interested in a mutual fund whose shares are currently selling for $10.00 each. You invest your initial $100.00 and get 10 shares in return. The next month, despite the fact the market dropped - your shares are now trading at $5.00 - you again invest your $100.00 and this time you receive 20 shares. Let's assume by the next month the market has recovered and the shares are again trading at $10.00. You invest your $100.00 and receive 10 shares. The next month finds the market continuing its rise and your shares are now selling for $12.50. You invest your $100.00 and receive 8 shares. Let's see how you have done: Monthly Share Shares Investment Price Purchased $100 $10.00 10 100 5.00 20 100 10.00 10 100 12.50 8 ---- ----- -- $400 48 --------------------------------------------------- Average share cost - $8.33 ($400 / 48) Ending share price - $12.50 You have invested a total of $400.00 and own 48 shares at an average price of $8.33 per share. Your 48 shares are worth a total of $600.00 - you have made a profit of $200.00 in a mixed market. Investing A Lump Sum: Single Share Shares Investment Price Purchased $400 $10.00 40 ----- ---- $400 40 ---------------------------------------------------- Average share cost - $10.00 ($400 / 40) Ending share price - $12.50 Had you invested the whole $400.00 in the first month you would have received 40 shares at the price of $10.00 each. Those shares would now be worth $500.00 for a gain of $100.00. Certainly a good return (using our example) but only 50% as well as using dollar-cost-averaging. The stock market will always fluctuate. This is a way to take advantage of that fluctuation. Dollar-cost averaging guarantees that you will always buy more shares when the price of the shares are lower and less shares when the price is higher. It doesn't take a lot of brilliance or hard work - just discipline. You must invest the same amount every month (or every quarter). 6. Liquidity: Mutual fund investors can cash in their shares at any time and receive the current value of their holdings. The fund is always ready to redeem (buy back) its shares. Most funds will allow you to use a wire transfer to transfer the funds directly to your bank account. Many funds also have a check writing privilege - if you need your money in a hurry, simply write a check. Many funds also provide for redemption via a toll-free phone call. 7. Family of Funds: Many mutual funds are part of a "family of funds" (a group of funds managed by the same company but with different investment objectives). The advantage to this is an option known as an exchange privilege or fund switching. Fund switching has become quite popular as fund companies have made it easy to move your money from one fund to another, usually with only a toll-free telephone call. Switching is an easy and convenient way to take advantage of changing market conditions. If the stock market began to decline, for instance, and your money was in a stock fund, you might consider switching your investment into a money market fund within the same family. 8. Convenience: Mutual fund shares are easy to buy. Generally, no-load funds have a toll-free number an investor (or potential investor) can call for information. Some fund companies have even set up retail centers for investors. Many have payroll deduction plans and some funds, with proper authorization, will deduct and invest on a regular basis a specified amount from the shareholder's bank account. You can automatically reinvest all dividends and capital gains distributions allowing you to compound your earnings. Conversely, you have the option of automatic withdrawal - you may elect to have your earnings and/or part of your principal sent to you, or anyone you designate, on a regular basis (so called check-a-month plan). Many funds offer checkwriting privileges. This can be very helpful when you need to have quick access to your money. Mutual funds are excellent vehicles for retirement investing. The generally long-term nature of mutual fund investing fits well with the long-term objectives of investing for retirement. *** End of Chapter ***