- Investment Company Act of 1940 and Mutual Funds
- Domestic Mutual Fund Vs. Offshore Mutual Funds
- How to Track Mutual Funds and Stock Portfolios Using Excel
- Advantages & Disadvantages of Stock Mutual Funds
- What Is a Growth Stock Mutual Fund?
- Why Would a Person Choose a Mutual Fund Over an Individual Stock?
Mutual funds can be attractive because they allow investors to gain exposure to many different financial securities at once, something that the average investor does not have the resources, time or expertise to do alone. Investing in an individual company's stock also has its benefits, as investors can determine when to buy and sell that position and can generally trade shares with ease. A stock's market value is transparent throughout a trading session, while mutual fund values are generally calculated daily.
Mutual funds offer investors much broader exposure to the stock market for their money, according to an article on the CNN Money website, given the variety of stocks or bonds in a fund. The account minimum threshold for mutual funds varies, but could fall below $500 or be more like $1,000. Investors can make additional investments, however, for as little as $50. To invest in an individual stock, investors need to open up a brokerage account. Brokerages may or may not require minimum investments. Some investment companies will waive account minimums if the investor uses other services, such as automatic transfers into the account.
Investors have less control when investing in a mutual fund versus investing in an individual company's stock, including when it comes to taxes. If a mutual fund earns profits throughout the year from selling equity positions in a portfolio, it becomes subject to a capital gains tax, which is then passed along to investors even if those individuals do not make a withdrawal on those profits. Investors in individual companies can decide when to reap profits, which dictates when any relevant capital gains taxes would be paid.
Since the financial crisis of 2008, diversification plays an even more integral role in the financial markets. Despite the fact that no investment category was immune to the recession, diversification -- which is more easily achieved with mutual funds than by investing in the individual stock of a company -- helped to mitigate some of the damage. Investors in certain diversified funds experienced losses of between 5 and 20 percent during the recession, while the S&P 500 index, a gauge of broad stock market activity, shed a more severe 37 percent, according to Bankrate.com.
Mutual funds charge an expense ratio, which is a yearly fee based on the assets under management. In 2011, mutual fund expense ratios were trending lower, as the average equity portfolio charged 79 basis points, or 0.79 percent, over 83 basis points in the previous year, according to the Investment Company Institute. Stockbrokers work on commissions and may charge for each individual transaction. Even with a transaction fee of $10, which is low by industry standards, according to CNN Money, an investor would have to invest at least $1,000 in each stock to keep fees from surpassing the 1 percent level. Other brokers may instead charge a flat monthly or yearly rate for all transactions.
- stock exchange image by Christopher Walker from Fotolia.com