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Mutual Funds

The Limitations of Mutual Funds

Mutual funds are limited somewhat, because of their inherent diversification. Diversification has the effect of both spreading the risk of any lagging industries, but also diluting the high returns that one or more industries may offer in a fund. For example, if the oil sector is one of the industries in a mutual fund and oil stocks have been on the rise recently, buying the oil stock itself may provide a better return than buying the mutual fund with the oil stock in it. Of course, this is hindsight, and since investors are concerned about risk, the safer investment is the mutual fund, so as to spread the risk over different industries or companies or both. Also, each mutual fund is only as good as its manager or management team. The Wall Street Journal and many other publications contain the daily price quotes of mutual funds, and as one can see, many funds in the same sector groups, or the same types of mutual funds have widely varying returns. Fund managers over the years have been significantly varied in the rates of return that they are able to achieve.

The investor ought to carefully study the past returns given certain expected economic conditions, of the mutual fund into which the investor seeks to enter. Naturally, past experience is no a predictor of future returns, and any mutual fund will not guarantee any future return. In fact, any mutual fund guaranteeing a future return, ought to be suspect. An investor should invest in mutual funds if he or she, after selecting a fund, pays a lump sum of money into the fund, either in the form of the minimum investment required by the fund or an amount over the minimum as directed or desired by the investor. The fund then charges a fee or commission to the investor upon the purchase of shares in the mutual fund. However in some cases, there are "no-load" funds, which do not charge any up-front fee. In many instances, these funds are some of the best investment vehicles, since the pool of money on which returns might be realized is not diluted by the payment of fees to the fund at the outset. For these types of funds, as well as other funds charging an up-front load, there is also a management fee charged on an annual basis. Each fund typically provides a quarterly or monthly statement of the progress of the fund, and the fund price is published on a daily basis in publications like The Wall Street Journal. The Wall Street Journal also periodically tracks the year to date performance of the fund, as well as the fund's performance during other periods of time. Those may also make an arrangement with the fund whereby the fund automatically withdraws, either from a personal bank account from the investor or the paycheck of the investor if the employer has a system in place for such withdrawals, to the fund on a weekly, monthly or quarterly basis. This can be a tremendous advantage to the investor wishing to stay on a goal for saving a specific amount of money on a periodic basis.

Mutual Funds
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