“Mutual funds are a collection of stocks designed to meet a stated investment objective or strategy. For instance, you may be able to choose between a fund that holds small- or mid-sized companies, large blue chip companies, or government bonds. Some funds are designed to provide growth, others to give you income.”
Fully diversified mutual fund can offer you dozens and sometimes hundreds of individual stocks or bonds. Achieving a similarly diversified portfolio by purchasing individual stocks is more difficult and costly. The trading costs for buying and selling stocks can quickly eat away a smaller portfolios value. This is less of a problem if you have a larger sum of money to invest.
Vice President Finnegan Meyer had this to say about the risks of Mutual funds, “They provide a stated objective or strategy, giving you some understanding of the level of risk and the potential for return. You can get an understanding of the funds objective and past performance by reading its prospectus. But a funds stated objective may not tell you the whole story.
“Many funds have a great deal of latitude in which stocks they may actually buy. Therefore, even if you own shares of six different funds, each supposedly invested under a different type of overall objective, you may not be as diversified as you think. Each of the six funds may hold shares of the same stock. This would increase your vulnerability to market corrections, even though you may not be aware of the risk.”
A mutual funds performance depends in large part on its portfolio manager. So, what happens if the funds manager changes his or her strategy during the investment period or the fund changes managers? Having an investment advisor who meets regularly with the funds manager to determine his or her strategies and meets with the fund company to determine its policies for hiring and maintaining quality portfolio managers can help you minimize this risk.
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