So what would you rather invest in — mutual funds or individual stocks? I’ve tried both and from my experience, using mutual funds has been far more fruitful for me than individual stocks have been. Why? It boils down to a few reasons:

• I’m a lousy stock picker.
• I don’t have time to follow and track my investments actively.
• I can potentially become an emotional investor if I handle my investments too actively.

Knowing my limitations, I’ve decided to opt for my core portfolio to be in mutual funds, while dedicating only a small percentage of my investments to individual stocks and other alternative investments.

Why Invest In Mutual Funds Rather Than Individual Stocks?

When you’re new to the stock market, I believe that it’s best to start with mutual funds to get your feet wet and to make sure that you’re able to manage your risks well. You’ll have to shop around for a good mutual fund, request a prospectus from each company you look into and review each fund’s holdings.

The average investor will gravitate towards buying mutual funds because they want representation in the stock market while making sure that they are diversified as well. Equity mutual funds make for great and easy investments since their fund managers are responsible for choosing the baskets of stocks that comprise the funds. They take away the guesswork for you. All you have to do now is to review what’s in each fund and find those funds that are in line with your investment goals. For instance, are you interested in U.S. index funds, foreign equity funds, small company stock funds or bond funds?

If you instead decide to pick stocks, you’ll be responsible for screening for those that should fit your portfolio. You’ll have to make the decision on which stocks meet your criteria, which will mean that you’ll need to know how to analyze these stocks and their underlying companies to find out if they’re worth buying. You’ll have to know how to “read” a stock and its characteristics to find out if it carries good value or has a good chance of doing well going forward. Not only that, you’ll have to do it several times over for each stock you include in your portfolio. You’ll need to worry about a few things: you’ll need to make sure that you create a diversified portfolio of such stocks and that you track the performance of each stock over time. With mutual funds, fund managers typically do all this work, and this is what makes investing with funds the convenient choice.

So let’s summarize a few pros and cons behind mutual funds:

Pros and Cons of Mutual Funds

What are some of the benefits of using mutual funds?

• They’re easy to invest in. You can even set up an automatic savings program where you can dollar cost average directly into funds every month.
• You can buy a diversified basket of stocks with a small amount of money. A $100 can get you started!
• Mutual funds are a practical way to teach children how to invest. Don’t forget that investing early gives you a huge advantage on building wealth.
• A mutual fund has sufficient liquidity since you can buy and sell it at any time.
• Fund managers take care of all the investment legwork for you.
• There are mutual funds that have decent track records over the long term.

What are some of the disadvantages of mutual funds over other types of stock investments?

• You won’t have the kind of control over your mutual fund that you’ll have with individual stocks.
• Depending on the type of mutual fund you own, your fund may cost more to own than holding on to stocks due to annual fund management fees, sales loads, redemption fees and 12b-1 fees.
• Mutual funds get their pricing at the end of the day. When you buy or sell a mutual fund it’s usually done at the end of the day when you receive the fund’s closing price. You won’t get to buy and sell funds at real time. Now if you’re interested in a diversified investment that behaves more like a stock (but has the attributes of a fund), then try an ETF (or Exchange Traded Fund).

It is important to review the pros and cons to ensure that a mutual fund is the right investment for you. Most individuals start out with mutual funds when they invest. However, remember that there are no guarantees with most investments, so it’s important to understand your risks, to weigh them and then to make the right decisions that will allow you to sleep at night.

Why Invest In Mutual Funds Rather Than Individual Stocks? is a post from: Investing Toolkit

In the world of investing, there are all sorts of mutual funds — from index funds, to actively managed — covering the spectrum of size and orientation. Now no one wants to invest in a mutual fund that loses money on a consistent basis or is charging you a lot of bucks for below average market returns. So the question here is, what makes a mutual fund “good”? What makes a fund worth the money that you are going to put into this investment? Here are a few characteristics you’d like to check out when shopping for a mutual fund:

Attributes Of A Good Mutual Fund

1. The fund’s mutual fund manager has a strong reputation.
When you invest in an actively managed mutual fund, you’ve got to check out the guy or gal who’s at the helm. This fund manager’s goal is to outperform the market and to come out on top of the competition. When the fund is a winner, investors tend to pour more money into that fund, possibly chasing returns (or hoping they’d receive the kind of returns expected of a fund with a great performance record).

You’ll know a mutual fund is a great choice if the fund manager controlling and managing it has a great reputation and a good track record. If you read up on some financial publications, these funds are written up front and center as top favorites.

2. The mutual fund has low expenses and low overall costs.
Check whether the mutual fund is a no load and has no 12 B-1 fees. Why bother with loaded funds when you can now own a well performing no load fund that’s so much cheaper to own? Take a look at the expense ratio of the mutual fund. This is what tells you how much it costs each year for you to invest in the fund. Furthermore, you can compare this expense ratio to the cost of other funds.

3. The mutual fund is a no load.
If you insist on owning a load fund, then it better be out of this world! Load funds are those that you’ll have to pay extra for to either buy or sell. Typically, these funds justify their costs because they claim that they (can) produce much higher returns than their index or no load counterparts. But that isn’t always the case. More often than not, buying a loaded fund simply means you’re paying the fund more for the same or lower returns you’d get by simply sticking with no loads or index funds.

4. The fund is a good size.
What does this mean? Well, some funds can actually be too big for their britches. Once a fund gets very popular, say because of their great reputation or a series of strong years where their returns beat the market, you’ll expect to see a flock of new investors sign up for it. But their popularity can spell the ultimate demise of their success. If the fund gets too big, they become much more unwieldy, so managers — if they’re good! — will typically close such funds to the public. So to get into a great fund (and to continue owning one), keep your eye on its size!

5. The fund is well awarded.
Check out Smart Money, Kiplinger’s, Barron’s and Money Magazine for lists that show which mutual funds make the grade. Scour the lists for common names: this can be your first step at determining which funds should belong in your portfolio. I’d use them as a great screening tool.

Where To Find Good Mutual Funds?

Where do you encounter these great funds? Again, check out financial publications (see your local library for them) and online resources like Motley Fool (fool.com), INO.com and Morningstar.com for ideas. Other places to go? Your friendly neighborhood online broker or mutual fund company — many of them host mutual fund screeners on their sites which you can use for free.

Keep in mind that there is no single mutual fund that can guarantee good performance all of the time. So it’s up to you to keep an eye on your portfolio and your funds to ensure that they are performing according to your expectations.

How To Find A Good Mutual Fund is a post from: Investing Toolkit