For those new to investing, a mutual fund can be an excellent option. The fund is built from a collection of stocks, which are hand-picked and overseen by a money manager. Often, these funds are available to multiple purchasers, and this group of investors help keep the costs associated with the fund down. This on its own sounds like a pretty great deal to me, because it offers so many possibilities, but it also, unfortunately has some drawbacks.
Perks
Personally, I think mutual funds are the bee's knees. For one thing, I like money, but I'm not interested in following the stock market daily. For another, I know a great money manager. And finally, I like to spread my money around a bit. Let me explain each of these in more depth.
I like money. I don't know anyone who doesn't like it. But most people I know do not enjoy reading the financial pages with a fine-toothed comb. However, there are people in the world who love to follow stocks, and we'll call them money managers. These finance wizards enjoy predicting the stock market and will hand-pick stocks for you to place in your mutual fund basket - win-win, in my opinion
Fortunately, I know a great money guy. He works at a small local bank and is one of those financial wizards...and someone I can trust with my money. These two very important principals can work for you as well. Seeking out these fellows at your bank can help you get to know an excellent manager you can trust.
Diversifying is also an extremely important financial principal, and luck be had, mutual funds offer diversification as is. By picking a variety of stocks, your money manager diversifies your stocks - and reduces your risk -without too much effort on your part.
Drawbacks
Of course, I know there are risks involved in every investment, so before I get too gung-ho, I must weigh the risks. The drawbacks to the mutual fund include finding a good money manager and watching fees.
I find these risks to be a combination factor. If you don't have a good money manager, you will most likely also have trouble with fees. If you find a good, honest manager, you will have little trouble with fees.
Therefore, your most important task in setting up a mutual fund is finding a good money manager. Most banks have an in-house money manager or two, but it may be difficult to determine the risk. Often, it is best to start is by asking your friends or family for references, then meet with the manager. If you hit it off, your money is managed...by a trust-worthy and capable individual.
Mutual funds may be a first-time investor's dream, but it is always important to find your best money-ally in an excellent money manager. So be cautious, have fun and reap the reward!
For more information about mutual funds and index funds visit MomVesting.
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