Young investors who are just starting with our a savings program will find that their friends, family and advisors will almost all have different views about how one should start to invest their money. For some, recommendations will come along the lines of buying real estate that can be flipped or rented out to generate monthly income and long-term capital appreciation. For others, it will mean putting as much money away as possible into a low-paying CD or maybe even mutual funds.
But for as many people who recommend funds, an equal amount will dismiss them for a variety of reasons. The three most common reasons people advise against funds are also the three ways that one can get a better understanding of what a mutual fund really is, a three-way definition as it were.
1. Mutual Funds are too risky. Although every fund, from money market funds, income funds all the way to equity funds and specialty funds will involve some element of risk, the fact remains that virtually every fund actually reduces risk. How? Through diversification. What this means is that a mutual fund takes all of your money (and every one else's) and invests in enough securities that anyone with less than $500,000 could never even imagine achieving. And since diversification is key to eliminating risk, saying that mutual funds are too risky is like saying air travel is dangerous. Risk is relative and in terms of reducing that risk, mutual funds achieve it better than any other investment.
2. Funds are expensive. Depending on the amount of money invested, most people cannot find better value for every dollar invested than they can when they invest in mutual funds. While the fund companies generate an expense for their administrative efforts, they almost always come in cheaper than investing individually through a discount broker. With most fees at 1% or less, an investor with just $10,000 to invest could only make 10 trades in 1 year at $10 each to achieve the same cost savings. This tells us that funds are owned by so many different unit holders that the collective pays a reduced fee, not the individual investor.
3. People who invest in Funds lost 50% of their savings when the market crashed. While many people certainly lost much of their portfolio's value thanks to the recent market crash of 2007-2009, funds actually offer enough different flavors of funds that smart, properly diversified investors would have lost much less than nearly any other type of investor. Between high yield investments, money market funds and specialty asset class funds, investors can find properly diversified investments for any and every need they may have. There is an abundance of selection; one does not need to be limited to domestic stock market-linked investments.
As shown here in the three most common arguments against this type of investment, mutual funds are basically highly diversified, risk-spread investments that, while they charge expenses, are cheaper than virtually any other type of investment out there. Best of all, mutual funds can be virtually any asset class, not just equities, providing investors with plenty of options.
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Chris has more than 17 years of financial services experience. He currently manages a website about Used Pallets at .
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