4 reasons to buy mutual funds
Here are a few key reasons why people invest in mutual funds.
1. Built-in diversification
When you buy a mutual fund, your money is combined with the money from other investors, and allows you to buy part of a pool of investments. A mutual fund holds a variety of investments which can make it easier for investors to diversify than through ownership of individual stocks or bonds.
Not all investments perform well at the same time. Holding a variety of investments may help offset the impact of poor performers, while taking advantage of the earning potential of the rest. This is known as diversification.
Before you decide on a mutual fund, figure out how it fits with the rest of the investments you own and your overall financial goals.
2. Professional management
You may not have the skills and knowledge to manage your own investments or want to spend the time. Mutual funds allow you to pool your money with other investors and leave the specific investment decisions to a portfolio manager. Portfolio managers decide where to invest the money in the fund, and when to buy and sell investments.
3. Easy to buy and sell
Mutual funds are widely available through banks, financial planning firms, investment firms, credit unions and trust companies. You can sell your fund units or shares at almost any time if you need to get access to your money. But you may get back less than you invested.
4. A wide range of funds to choose from
Mutual funds can be used to meet a variety of financial goals. For example:
- A young investor with a stable income and many years to invest may feel comfortable taking more risk to achieve greater potential return. They may invest in an equity fund.
- A mid-career investor trying to balance risk and return more moderately could invest in a balanced mutual fund that buy a mix of stocks and bonds.
- An investor approaching retirement might be less comfortable with risk and more interested in fixed income investments. They may invest in a bond fund.
Reasons mutual funds may not be right for you
- Fees – You must pay sales charges, fees and expenses regardless of how the fund performs, even if the fund has negative returns.
- Transparency – The fund’s holdings are only known to investors at certain points in time. And you don’t have any influence or control over specific investment decisions made by the portfolio manager.
- Pricing – With an individual stock, you can get real-time (or close to real-time) pricing information by checking financial websites or by calling your advisor or broker, and you can monitor changes in those prices as they move during the day. With a mutual fund, the price to buy or redeem your shares usually depends on the fund’s net asset value (NAV), which is generally calculated only once every business day, typically after the major Canadian exchanges close.
4 key points
- Built-in diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition
- Professional management
- Ease of buying and selling
- Wide range of funds