Mutual funds can be a great option for investors who want the benefits of diversification but don't want to spend a lot of time choosing individual investments or worrying about high minimum investment levels.
Top 10 reasons to invest in mutual funds
Because mutual funds hold a basket of investments, they provide instant diversification, which can minimize portfolio risk and volatility. For example, a balanced fund would hold a mix of stocks and bonds, based on the theory that stock and bond prices don’t often decline (or increase) in tandem.
2. Little time commitment
You can build diversification into your own portfolio of investments but it takes time and expertise to research which investment are likely to best complement each other. With mutual funds, the research and monitoring are done for you.
3. Professional advice
Each mutual fund’s holdings are chosen by professional investment managers based on a sophisticated investment approach, so you automatically have access to this expertise.
4. Low minimum investment
In addition to being time consuming, creating your own basket of diversified holdings can be expensive because you have to invest a minimum amount in each stock/bond you want to own. With mutual funds, your money is pooled with that of a large group of investors, which keeps your minimum investment amount down.
5. Lower trading costs
The trading costs of buying and selling dozens of individual investments as markets change can be very high. Every investor that holds a piece of a mutual fund shares its trading costs, making these costs more affordable.
6. Investing discipline
With a mutual fund, your investment decisions are made for you, so you’re not being driven by fear in a downmarket or euphoria in an upmarket. Your focus can always remain on the long-term rather than trying to time the market over the short-term. This way, you can avoid missing out on potential gains when markets rise.
7. Dollar cost averaging
When you invest in a mutual fund, you can invest a set amount at regular intervals (monthly, for example). With dollar cost averaging, you can potentially buy more units of the fund when prices are low and buy fewer units when prices are high, which may result in a reduced purchase price over time.
8. Convenient reinvestment
When a mutual fund distributes income such as dividends to investors, you can automatically reinvest the income in more units of the fund with no transaction fees. Over time, the power of compounding can lead to significant growth of your investment.
Mutual funds are relatively easy to buy and sell at any time, and are available through most banks and investment firms.
10. Range of options
From pure equity funds that maximize returns but carry higher risk to money market funds that minimize risk but offer significantly lower returns, there’s a mutual fund for virtually every type of investor. With a little research, most investors can find a fund that suits their financial goals and needs.
To learn more, talk to your financial advisor and visit AGF.com.
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