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When investors pool their money together with a predetermined investment objective, it is simply said as a mutual fund. In addition, fund manager will be responsible for investing the pooled money into specific securities where as it is usually in stocks or bonds. By buying shares or portions of the mutual funds, we become shareholder of the fund and do not have to figure out which stocks or bonds to buy.
Furthermore, by purchasing mutual funds, you are essentially hiring a professional manager at an especially inexpensive price. Even if some of us are better at picking stocks than a professional and their support staff, most of us would not want to spend the amount of time it takes to watch, research (learning how to read financial reports to see how much money the company is making, and what strategies it is using to grow earnings) and trade the market on a daily basis. On the other hand, by pooling investors' monies together, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free and have personal contacts at the brokerage firms. One reason people by mutual fund is, by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification. Another reason is diversification, spreading out money across many different types of investments and minimizing the risks, when one investment is down another might be up. If doing diversification by ourselves, it could take you weeks to buy all these investments. Hence, we can purchase a few mutual funds which can be done in a few hours; mutual funds automatically diversify in a predetermined category of investments then. Indeed, there is no greater advantage to using mutual funds than diversification. Besides that, mutual funds are highly liquid. Stocks can be much more difficult depending on what kinds of stocks you are invested in, and bonds can be difficult too. For the new investors, mutual funds are extremely good because it can be invested with small amounts of money and invested at regular intervals with no trading costs. In contrast, stock investing carries high transaction fees making it difficult for the small investor to make money. The other more important is mutual funds are non-discriminatory. It does not matter whether we have Rp 50 millions or Rp 500 thousands; we are getting the exact same manager, the same account access and the same investment. Inversely, wealthy stock investors get special treatment from brokers. In general, mutual funds carry much lower risk than stocks. This is primarily due to diversification. Regarding to stocks, one worry is that the company you are investing in goes bankrupt. With mutual funds, that chance is none, since mutual funds typically hold anywhere from too many companies. Buying mutual funds, we do not need to learn how each company is doing (mutual fund manager does). However, we still need to research the past performance of the mutual funds. We also need to decide which sectors seem most promising. In the end, we still need to know how the economy is doing. In brief, mutual funds offer at least four characteristics that many investors find attractive: Professional Management, Diversification, Selection, and Convenience. (Dedianto Turnip)
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