Stock Mutual Funds
A stock fund is an investment company that invests primarily in individual stocks of publicly traded companies. For example, if you invest in a fund that owns shares of GE, Microsoft, Proctor & Gamble, and Dell, then you have invested in a stock fund. Some stock mutual funds also hold bonds and cash, but stock funds will typically allocate at least 80% of the portfolio assets to stocks.
The Pros of Investing in Stock Mutual Funds
Diversification: Perhaps the most positive aspect of a stock fund is that you can invest in a single stock fund and have money invested in hundreds of individual stocks. This diversification will reduce “company-specific risk,” which is the inherent risk of buying stock in only one company. Professional Money Management: Investing in individual company stocks not only takes resources but a considerable amount of time. By contrast, stock fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their stock fund. Systematic Investing and Withdrawals: Investing regularly in a stock fund is simple. Some mutual fund companies allow investors to invest as little as $50 per month directly into the stock fund without incurring a transaction charge. This is called a Systematic Investment Plan. In this plan, money is pulled directly from your bank account or paycheck and invested directly in the stock fund.
The Cons of Investing in Stock Mutual Funds
Weighing the Pros and Cons of a Stock Fund
It’s important to weigh each pro and con of investing in a stock mutual fund prior to making a decision to invest. In many cases, what one investor might see as a pro, another investor might see as a con. As an investor, you owe it to your future self to have a comprehensive understanding of the pros and cons of stocks funds and how to avoid or minimize the disadvantages of them.
