The Advantages of Investing in Mutual Funds

Many investment options exist from which a potential investor can choose. To a first-timer, however, the options that the financial arena offers are overwhelming and confusing. But, which option provides the most opportunity for producing wealth? The answer lies in mutual funds, and perhaps also exchange-traded-funds.

Why are mutual funds preferred over stocks? The first reason is that mutual funds are much less work to manage than stocks. If one expects to pick stocks and perform a consistent return of 10%, the market average, one must make picking stocks a full-time endeavor. The vast majority of professional investors, even those who spend more than forty hours per week, do not pick stocks well enough to beat the market average return of 10%. In other words, the amount of time they spend picking stocks does not justify the amount of cash generated. To pick mutual funds successfully, one need only spend a few hours per week, and not necessarily every week, keeping updated on market trends. Mutual fund managers have investment teams that are built to make good picks so that one does not have to on his or her own, and picking a good mutual fund manager is key.

The next reason that mutual funds are preferable to stocks is that as soon as one buys into a mutual fund, he or she already has an excellent level of diversification, although it is possible to buy into sector funds which track a particular sector such as healthcare or insurance.

Mutual funds are also much easier on one's emotions. If stocks can be like riding a roller coaster, mutual funds are more like riding a children's roller coaster. The highs and lows are much lower than those of stocks, which means that one is less inclined to make silly mistakes like selling too high when a fund is doing or well or buying before a fund comes closer to its low.

Another point about mutual funds is that while many challenge that most mutual funds return less than the market average of 10% per year (and they are in fact correct when saying this), there still exist a good percentage of mutual funds who return the market average, and even better. As with all things, the more research and access to quality information one has, the better performance one can hope to achieve.

The final point about mutual funds is that they are easier for small-time investors to access. Many funds require only $1,000 to startup, and these funds perform just as well as others that have a higher requirement for starting an account. Most funds seem to require $1,000-$10,000 to open an account, but the $1,000 minimum was used in order to show that even the poorest of potential investors can begin in a short period of time. Stocks are a little more expensive for the small-time investor due to brokerage fees, although these fees can be as little as $7 at some brokerages. $7 for a trade that totals $1000, for example, means that only $993 are actually being invested, and also that .7% of the funds are being paid to the brokerage immediately, which is not a good thing. Mutual funds have their own fees, but if one pays attention and is diligent in his or her research and knowledge, one can avoid the unnecessary fees.

In short, these are the reasons that mutual funds are an excellent option for building long-term wealth, which is the surest way for one to become wealthy in life.