Mutual funds are the most popular form of investment account across the United States, allowing individuals to take advantage of professional portfolio management with a very low barrier to entry. As such, many individuals and financial advisors alike want to know the upsides to buying into a mutual fund to help their long-term investment health.
As experts in assessing financial plans, we outlined our top three reasons below.
How Do Mutual Funds Work?
First, it’s important to understand how a mutual fund works as they are fairly different from buying and selling the market as an independent investor.
As the name suggests, a mutual fund is any kind of investment account that is funded mutually. A group of investors pool their resources together, giving them more financial mobility when it comes to involving themselves in various markets– allowing them to have more opportunities and more easily diversify their accounts.
The main advantages of this system is that mutual funds are friendly toward new investors who may not initially have many resources. By pooling resources, investors are allowed to buy larger quantities of stable, typically expensive securities.
Finally, due to the large pool of assets generated by mutual funds, the portfolios receive professional management and oversight. This allows you to not only check the performance of a given portfolio before you invest, but it ensures that your investments will be regularly assessed to ensure top performance.
Benefit 1: Risk Management
Unlike Exchange Traded Funds (ETFs) that have the ability to be traded more similarly to the stock market, mutual funds are only purchased at the end of the trading day. This leaves less room for the arbitrage and short-selling characteristics found in day traders and more aggressively traded investments.
Unfortunately, while the risk is markedly lower, it is not eliminated. Any time you invest in the market, even when using a financial advisor or professional money manager, there is a potential to lose money.
Benefit 2: Instant Diversification
As the saying goes, never put all your eggs in one basket. In investment terms, this would equate to spending all your money on an individual stock and hoping for the best. As you can see, that is a very dangerous plan.
As such, diversifying your investment portfolio is one of the easiest and most effective ways to further reduce your financial risk.
What does a diversified portfolio look like? While it depends on your particular investment company, there are generally 4 levels of investment categories mutual fund companies will take advantage of.
Growth and Income: Out of the 4 categories, this is the most secure and will likely create the solid foundation of many mutual funds. These are investments in large companies that generally worth over $10 billion and are well established names for a majority of the population. That means that even when the economy takes a turn for the worst, these companies have a high likelihood of recuperating and remaining profitable.
Growth: They next category up, these types of investments are usually medium sized companies averaging a worth of $1-2 billion. While investing in these companies are slightly riskier, they also offer greater return and growth potential.
Aggressive Growth: The riskiest of the 4, this category represents small, new companies. Investments here are made for the long-term strategy and investing early will result in the highest growth and largest profit should the company succeed. However, since the size of these companies are often very small, they are more vulnerable to economic damage, thus creating a risk to your investment should their business head south.
International: This represents companies of various sizes that simply are not US owned. Common names that fall into this category are corporations such as Trader Joes and Gerber.
Benefit 3: Professional Fund Management and Benchmarking
When you invest in a mutual fund, you have the benefit of a team of investors and financial experts to help buy and sell assets in the most profitable way possible. As part of this set up, mutual funds offer a wealth of information to their investors which allow them to keep track of how the portfolio is doing over time.
The process is known as benchmarking.
Through benchmarking, financial advisors will compare and list the performance of their mutual fund over various lengths of time from short term (3-5 years) to long term (10–20 years). These benchmarks will not only indicate the general health and efficiency of the fund, but allow you to compare their performance to other publicly available indexes such as the S&P 500 and the Dow Jones Industrial Average.
Finally, benchmarking allows you to rest assured that the fees associated with your mutual funds are reasonable, and you are not being needlessly price gouged. This is beneficial for both financial planners and investors alike, as it keeps the payout process as far as possible so everyone involved can reach a maximum benefit.
Protect Yourself from Financial Loss: Hire a Benchmarking Expert
One of the benefits of mutual funds can be used to build a stable 401(k) plan for individuals. This means that either as a financial advisor or as a consumer, you will want to have your plan benchmarked as regularly as possible. This shows you where you need to readjust fees and any pitfalls in your strategy, helping everyone in the long run and reducing the changes of a problem occurring down the line.
We know how important this is, so at Benchmark My Plan, we decided to offer the service to investors at no charge to them.
Our large network of financial advisors are ready to help you benchmark your 401(k) at a moment’s notice. Reaching out to us is quick and easy. Simply give us a message or call and we can connect you with an advisor that is right for your case.
Are you ready to protect your investments? Benchmark today.