Many investors use stock mutual funds as a cornerstone of their investment strategy, and they profit soundly over the long term as a result. They cite professional management and the potential for good growth among the reasons for their choice. Others may find these investments less suitable, ranking the tax ramifications and lack of personal control as the biggest problems with stock funds. Carefully consider the advantages and disadvantages of stock funds before investing money.
A study performed by John Bogle, founder of the mutual fund group Vanguard, found that the average stock mutual fund gained 10.3 percent over a 20-year period ending in 2003. Compared with more conservative investments such as certificates of deposit and money market mutual funds, stock mutual funds earn a substantially higher rate of return over the long term.
Stock mutual funds give the individual investor an easy and convenient way to reduce risk by utilizing diverse investments. Stock mutual funds pool money from different investors and purchase shares in multiple companies according to the fund's investment strategy. Investing in many different companies lowers your risk of loss, compared with investing all of your money in one company.
Stock mutual funds employ experienced managers to analyze companies and decide which stocks to purchase. The professional management team has more expertise as well as time to review investment picks than most individual investors. Some funds may hire professionals with experience in certain industries in which they invest to give more expertise to their investment choices.
Each time the fund manager sells a stock, you will be responsible for paying the capital gains tax on the sale if the stock has gained value. You have no control over the timing of this and will not be able to plan for or to minimize the impact of this taxable event.
The professional management teams that operate stock mutual funds come with a price, and their salary is paid by the fund's shareholders. In addition, each trade that the management team makes results in commissions and other trading expenses. Some funds do a better job of controlling expenses than others.
Unlike other investments that have more stable returns and could be insured against loss, stock mutual funds are volatile. While over the long term stock mutual funds tend to gain value, the price fluctuates daily, sometimes by a large amount. If you sell shares to withdraw money when the fund's price is down, you could lose money.