If you have been thinking about starting an investment portfolio, but feel overwhelmed by the amount of information you would need to make good decisions, there’s still hope for you. Mutual funds are a good way for a beginner with very little experience or limited funds to get started with investing in the stock market. Here are some of the advantages inherent in mutual funds.
One big advantage is that they can be a low cost way to manage risk, because there is at least minimal diversification present due to the variety of stocks included in the fund. However, you still may need to purchase shares in more than one fund to thoroughly diversify your investments. Some mutual funds only hold stocks in one industry (for instance, pharmaceuticals or energy). Even though the fund would allow you to diversify across that sector by owning shares in several different companies within it, you would not be truly diversified across the market. In that case, a good strategy might be to invest in another mutual fund that is expressly designed to diversify its holdings across several business sectors.
The reason for doing this, of course, is so that you don’t lose all of your money if one sector takes a downward turn. For instance, look at recent occurrences in the residential real estate industry. The downturn in residential mortgage lending affected new home construction as well. So if you owned shares in a mutual fund that was heavily invested in the residential real estate sector, you would be hard hit by the downturn.
If you have limited funds for investing, mutual fund shares can usually be purchased in relatively small dollar amounts, and in even increments. That means you may be able to buy as little as $100 worth of shares. With stocks, you would have to buy in increments of whatever the market price is. That means if the shares were currently trading at $171 per share, you would have to buy them in $171 increments. So if you had $200 available to invest, you could only buy one share.
If you have limited knowledge of the stock market and little or no experience, mutual funds offer the advantage of being professionally managed. That means the manager researches each stock that comprises the fund, so that you don’t have to. However, you still need to do your own research of the mutual fund. You also need to research the track record and experience of the fund manager. But that is substantially less research on your part than it would be if you had to research several dozens of stocks.