Essays on Extra Credit Term Paper
Retirement Planning at J&J Bagel ADVANTAGES AND DISADVANTAGES OF MUTUAL FUNDS OVER COMPANY STOCKS
Mutual funds are simply a means of making an investment along with other people through pooling funds and resources together primarily to invest in some lucrative business deals (Northcott). As such, the mutual fund amount to more money than when one could have made an investment individually. Some benefits of mutual fund over a companys stock include;
Diversification is the first benefit associated with mutual funds. In relation to this, one fund can hold securities from many issuers of stock. As such, diversification significantly reduces the risk of monetary loss as a result of problems in one particular company (Haslem). Therefore, other than investing in J & J Bagel Inc., which could face some problems in future, it is better to diversify the portfolio by investing in mutual funds, which buy stocks from hundreds or even more companies to diversify risks.
Professional Management is the second benefit. Mutual funds hire professional managers to manage the investment. These managers have the skills, resources and education to research on diverse investment opportunities (Haslem). A company’s stock not managed by professional managers might result in financial losses to the company because most of the company managers do not have the expertise and time to manage their stock in order to reinvest dividend and interest efficiently.
Liquidity is another benefit, in that shares and units in the mutual fund can be sold and bought during any business day, thereby facilitating investors with quick access to their money. The company’s stock is sold or bought when the company authorizes; thus accessing the liquid cash invested in company stock is not easy (Northcott). This could interfere with one’s investment plans in case of an emergency.
Flexibility is also a benefit found in mutual. Most of the mutual fund firms manage a number of different funds, for instance fixed income, money market, global and index funds, which allow investors to switch between different funds at a minimal or no charge, unlike the company’s stock, which limit an investor to only make an investment in shares of a particular sector, which could be operating in a single region only.
However, the mutual fund has shortcomings, which include; when one makes an investment in mutual funds, it is like placing your money in the hands of professional managers. Therefore, the return one gets is primarily dictated by the managers’ judgment and skills. This contrasts the company’s stock, where returns do not depend on an individual, but on the whole workforce of that particular company. In this regard, the mistakes committed by a single manager can be corrected by another manager in the same or different department, thereby reducing investment risks in the company (Haslem).
In addition, fees charged by fund managers to offer the management services for the investment are very high. This reduces the returns on the investment. Managers who manage the company’s stock are just employees of that company; hence they cannot charge any additional fee to manage a company’s stock.
Also, redeeming mutual funds investment in the short-term could greatly impact negatively on returns because of the redemption and the sales commission fee, which in most cases are very high. Redeeming a company’s stock does not require an investor to pay any fee.
6. REASONS FOR INVESTING IN SMALL-CAP AND YET IT HAS THE EXPENSES TO BE INCURRED
The most important factors that an investor considers when making an investment are the returns and risks associated with that particular investment opportunity. An investment perceived to be riskier is also associated with high returns. In this regard, Small-Cap has a lower risk level, implying that it is still a viable investment as it guarantees an investor some returns though at a lower rate.
Haslem, John. Mutual Funds: Risk and Performance Analysis for Decision Making. New Jersey: John Wiley & Sons, 2009.
Northcott, Alan. The Mutual Funds Book: How to Invest in Mutual Funds & Earn High Rates of Returns Safely. Washington: Atlantic Publishing Company, 2009.