 Personal Finance Powerpoint Presentation, Mutual Fund versus Stock. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia. Why would someone choose a mutual fund over a stock which you can find online? Take a look at the references, resources, continue your research from there. This by the Investopedia team updated March 29, 2022 in prior presentations. We've been taking a look at investment goals, investment strategies, investment tools, keeping in mind the two major categories of investment that being fixed income, usually bonds and equity, typically the stocks. When we're thinking about the stock side of things, we can have individual stocks. We might be using other tools such as mutual funds or ETFs. That's going to be our focus now when we ask the question, why would someone choose a mutual fund over a stock? Investing can be complicated and overwhelming. There are many different investment options including stocks, bonds, real estate and money, market accounts. If you invest on your own, it's up to you to pick your investments, monitor their performance and modify your investment strategy over time. Another option for investors is to partner with a mutual fund. So now we're thinking, okay, we're investing in the stocks. I can pick individual stocks because I want to basically diversify, but that could be difficult. So you might use the tools such as a mutual fund to make the process a little bit easier to diversify. So a quick recap here, when we're investing in equities, we're typically investing in stocks. Corporations are separate legal entities. They're going to break up the ownership of the corporation in fixed units called stocks. Those corporations, if they want to generate capital, might be able to then get on the exchange and exchange. Then I can help the distribution of the stocks or can help the corporation to generate capital or revenue to help them grow by issuing stocks to individual investors. Now individual investors could buy individual stocks, but it could be costly to do so or hard to diversify. Another strategy that could be taken is that you invest in mutual funds, mutual funds that allow a pooling of money together so that the fund itself could then buy a more diversified portfolio and you've got a whole wide range of different kind of formats that the mutual funds could take. You can have managed mutual funds. You can have targeted mutual funds and you might have mutual funds that are based on indexes in order to reduce the costs of basically managing indexes being kind of averages of the different sectors and so on. So you can still build wealth through investing, but a mutual fund helps make investment decisions for you. If you're curious why some investors choose to invest with a mutual fund instead of picking their own stocks, read on to learn some common advantages of mutual funds. The basics of mutual funds. Mutual funds pool money together from a group of investors and invest that capital into different securities such as stocks, bonds or short term securities. So now instead of us buying individual stocks, we're going to be pooling our money together into a mutual fund. So now we've got different people putting money into the mutual fund. The mutual fund now has a pool of money that they can use to invest in different ways. Now, of course, you can have a whole different kind of a lot of different kinds of mutual funds that might invest, that are geared towards investing in a particular sector. They might be investing in different kind of things like stocks and bonds and short term securities, or they might just be investing in stocks or particular kind of stocks. They might be managed or they might be based on indexes or averages to reduce management kind of costs and so on in that way. But the general idea of the mutual fund, we're going to get money pooled together under this group of mutual funds and that will help us to kind of diversify and so on in our investments and possibly be an easier strategy than certainly easier than just picking individual stocks if you're trying to get a diversified portfolio. So each mutual fund has a different investment objective which drives the strategy and selection of investments within the fund. So the fund itself should give you an outline of what the fund is intended to be doing. Each fund has a money manager responsible for the fund and the manager's objective is to generate income for investors by investing portfolio assets and protecting the portfolio's value. Mutual funds can hold many different securities which makes them very attractive investment options. So different securities means that we can diversify within a mutual fund with a lot less of our particular effort picking stocks because we're dependent on the fund itself and the manager of it to do so. Advantages of mutual funds. There are several specific reasons investors turn to mutual funds instead of managing their own portfolio directly. The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification convenience and lower costs. So most individual investors are going to utilize mutual funds in some way. Typically oftentimes people start investing when they get access to say a 401k plan or 403b plan or possibly putting money into an IRA. Typically they're going to be utilizing like a mutual fund strategy in those cases. So ask any investment professional and they'll likely tell you that one of the most important ways to reduce your portfolio risk is through diversification. So if you watch like the experts portfolio managers on the news and what not on the stock channels they have all these different words that seem to mean the same kind of thing which is you should be diversified. So diversification is important. It's something they don't like to say all the time because it's become kind of cliche now. We possibly it's one of those things we hear now and we don't really register what the meaning is anymore because we've heard it so many times but it is foundational and so we want to we want to dive into it. So instead of investing in just one company industry or investment vehicle there's benefit to spreading your investments across different holdings to minimize potential losses. So that's the point. So if you have all your eggs in one basket that's the old adage then you don't want to do that. What's another old adage that we don't really pay attention to because we've heard it so many times but it makes sense. You got the first five don't want all your eggs to be broken. So the less correlation your investments have the lower risk of them all dropping at the same time. So many experts agree that the benefits of diversification are mostly realized when a portfolio holds stocks in at least 20 different different and differing companies. At that point a large portion of the risk associated with investing has been diversified away. The remaining risk is deemed to be systematic risk that will impact any security or holding. So in other words there's a couple of risks that could be involved if you have all your money in one stock clearly if that stock has a problem that company has a problem that could be a problem for you big problem. But if you have 20 different stocks then if one company has some kind of thing some scandal happened or something then that shouldn't affect you as much. But if there's a downturn in the entire market all stocks go down in other words then the diversification is not going to help you as much you might then have some diversification in other assets such as bonds CDs and so on to hedge against that type of thing. Since most brokerage firms charge the same commission for one share or five thousand shares it can be difficult for an investor to buy into 20 different stocks. In other words if you're buying the stocks individually it can be costly because you're going to be paying for the trades typically. So in addition it's a delicate balance weighing the benefits of varying correlation coefficients with a long term projected success of a company. That's where mutual funds come into play. Mutual funds offer investors a great way to diversify their holding instantly. So unlike individual stocks investors can put a small amount of money into one or more funds and access a diverse pool of investment options as a single mutual fund may comprise dozens of different securities. So if you have a small amount of investment then you can't really diversify with individual stocks that easily because you would need multiple stocks to diversify and you'd run out of money. So if you put money in the mutual fund the mutual fund can then pool it with other people and then help you to diversify that way. Mutual funds also invest in a variety of different sectors. Some of the biggest mutual funds invest in S&P 500 companies or large cap stocks. So that's probably one of the biggest mutual funds that you've heard of the S&P and you can think of it as kind of like an index kind of thing are invested in the larger companies which are less likely. You think less risk there. So now you can think about which mutual funds you want to invest in. You want to invest in mutual funds that are by sector based on risk of the sector for example or possibly mutual funds that are managed. They have more active management on the mutual fund or possibly mutual funds that are index funds that are tied to indexes or possibly targeted mutual funds those that actually change the mix of holdings between stocks, bonds, types of stocks as you reach the target possibly say retirement for example. So others may specifically target companies with smaller market capitalization or specific industries like technology, healthcare or raw materials. Again if you were to try to match this through individual stocks you'd have to spend a lot of time selecting your investments. Convenience. Another reason investors choose this investment option is the convenience of mutual funds when deciding how to allocate the equity portion of your portfolio you can defer that decision to an investing expert rather than by individual shares yourself. Some investors find that buying a few shares of mutual fund that meets their basic investment criteria is easier than researching companies to invest in and directly purchasing their stock. So clearly if you're not really active in terms of your trading it's going to be more difficult for you to do the due diligence to be purchasing individual stocks and you may therefore think it'd be an easier wiser choice to buy buying the mutual funds which have a longer term time horizon possibly investing more in the market as a whole or sectors as a whole as opposed to trying to pick and choose individual stocks that are going to be winners or losers hoping that usually over the long term many individuals, investors investing for things like retirement having a long time horizon then you will do well over the long term. Notice that the big company stocks could rise and fall even within someone's timeframe until they hit retirement like a 30 year time horizon. So if you're going to be spending your time on individual stocks then you might have to obviously spend a lot more time thinking about which stocks to be investing in if you're investing in sectors as a whole or the market as a whole diversification as a whole then you don't have to spend as much time because you're just trying to allocate according to averages betting on the market instead of individual stocks. So investors use mutual funds when they prefer to leave the research and decision making to someone else this convenience translates into relying on a money manager to help determine your portfolio's asset allocation. Now that money manager is someone that you're going to have to deal with because now you've got to pay the money manager who's managing the portfolio but the question is how much active management is that money manager doing because you already have restraints in terms of which sectors they're going to be investing in and you might further restrain the money manager by saying I want to invest in say index funds which are based on averages and therefore the money manager needs to just make sure that the portfolio is lined up to the funds properly as opposed to paying them for their expertise to try to outpace say index funds or anything like that. So people devote their entire careers to learning and understanding the stock market so it's often more beneficial to rely on their expertise than attempt to learn the industry on your own. Many mutual funds also offer investors an easy opportunity to buy into a specific industry or to buy stocks with a specific growth strategy. Here are several examples of the different types of easy accessible mutual funds. You got the sector funds investing companies within a specific industry or sector of the economy. You got the growth funds focus on capital appreciation through a diversified portfolio of companies that have demonstrated above average growth. You've got the value funds investing companies that are undervalued and are normally held by long term investors. You've got the index funds allow investors to track the overall market by cons by constructing a portfolio that tries to match a track a market index and you got the bond funds generate monthly income by investing in government and corporate bonds as well as other debt instruments. So note when we're trying to break down our investments we often break down the kind of stocks and put them into these groups or categories and then as we do so and we try to kind of measure the market the market tries to break these these groups down into sectors and then we try to actually measure those sectors with things like indexes and indexes are kind of like if you were to try to try to try to get some a group of people's opinion about like an election or something like that you would pick some group or some representatives of that group that you think best represent the group and then analyze them and then try to extrapolate that to the entire population that's kind of what an index is doing it's trying to measure when you buy an index you're not investing in every stock in the index you're trying to invest in companies that represent the stocks within that index. So it's useful to kind of know these names because then you could pick mutual funds for example to try to try to give a give a relative diversified sector portfolio or representation within each of these sectors or you might try to pick a mutual fund that tries to do that automatically right you might try to pick one mutual fund that tries to tries to diversify within kind of these sectors that's another approach that can be used so let's look at them one more time. So we've got the the sector funds invest companies within a specific industry the growth funds focus on capital appreciation through a diversified portfolio of companies that have demonstrated above average growth then we've got the value funds investing companies that are undervalued and are normally held by long term investors and then the index funds these are the ones that typically have the possibly lower management costs because the manager is not trying to actively pick even within these sectors they're they're just trying to tie the sector as we see here allow investors to track the overall market to constructing a portfolio that tries to match or track market indexes so you're basically saying I want you to just put the money on the average that so I'm betting on the market and that might lower the cost for the management cost and then of course you could have bonds in there as well so you can mix in the fixed income into your mutual funds as well so costs the cost of frequent stock trades can add up quickly for individual investors gains made from stock price appreciation can be cancelled out by the cost of completing a single sale of an investor's share of a given company so the sale cost for one stock could be could be high as you as you have to pay for the transaction fees so with a mutual fund the cost of trading is spread over all investors in the fund therefore mutual fund capitalizes on economics of scale and often results in lower costs per individual than those of individuals with a self purchase the investment many full servers brokerage firms make their money off of these trading costs and traders may find they are charged charged for every buy or sell order they place so it could be cheaper you know to buy and sell the mutual fund because the mutual fund has scale on its side and therefore the cost for individuals may be basically lower due to that most online brokers have mutual fund screeners on their sites to help you find the mutual fund that fit your portfolio you can also search out funds that can be purchased without generating a transaction fee or funds that charge low management fees instead of paying fees every time you invest into a mutual fund the mutual fund will charge an ongoing fee to cover the cost and labor of maintaining the fund are mutual funds a good investment mutual funds are are a good investment for investors looking to diversify their portfolios instead of going all in on one company or industry and mutual fund invests in different securities to try and minimize your portfolio's risk what are some disadvantage of mutual funds mutual funds take control out of the investors hands instead of ticking the companies you want to invest in you're often limited to what a money manager thinks is best so obviously you can't you're you're now pooling your money with everybody else so you can't go to the to the mutual fund money manager and say hey I want you to put more of our mutual fund money here or there no now you're you're pooled together and you're you're paying for the money manager now you could say I want a mutual fund that's geared towards these specific things or mutual funds that are geared towards an index and that limits or ties the hands of the mutual funds but clearly you don't have as much control once it's in the mutual fund it's going to be allocated by the terms the fund and the manager managing it depending on how much they have control they have over it so there are also ongoing management fees associated with mutual funds that may be more expensive than brokerage companies offering low cost or no cost individual stock trades are mutual funds safe like all other securities mutual funds are investments that are subject to losses however the goal of a mutual fund is to reduce investment risk so mutual funds can often be less risky than other types of investments due to its diversification