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Mutual Funds for 2022?

Is This the Year to Invest?


A mutual fund is a type of investment vehicle that pools money from many investors to purchase stocks, bonds, or other securities. Investors who mutually contribute to the fund company become part owners of the fund’s portfolio and the income it generates or loses, Business Insider

In 2020, 45.7% of US households owned mutual funds, compared to just 5.7% in 1980 according to an Investment Company Institute (ICI) survey.

2022 promises to be another year of economic uncertainty, as the world tries to recover economically from the pandemic — in spite of variants, ever-changing vaccine mandates, and supply chain shortages. Treasury Secretary Janet Yellen predicts that the record inflation that has hit the U.S. and the rest of the developed world, may continue before slowing by summer.

What are the advantages and disadvantages of mutual funds?

Here are advantages and disadvantages that can help you decide whether they are the right fit for your investment style and goals.

Advantages:

  • Adds diversification to your portfolio with various asset classes and industries held in one fund.

  • Typically requires a small minimum investment to buy in

  • Ability to invest with exact dollar amounts versus buying shares of stocks at fluctuating prices.

  • Offers simplicity and peace of mind with professional fund managers.

Disadvantages:

  • Professional management fees can be costly.

  • Mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC), so there is the risk of losing money.

  • Since mutual funds trade after markets close, they don’t allow for trading during the day and taking immediate advantage of market movements.

  • You have no control over a fund manager’s decisions, which can trigger tax implications like capital gains that add to your taxable income.

Essential Tips for Beginners

According to Bank Rate, these tips can help you select the best mutual funds for your needs:

  • Do your research and evaluate past performance

  • Consider your investing goals and risk tolerance

  • Know the fund’s management style

  • Understand the differences between fund types

  • Remember to diversify your portfolio

Ask yourself the following questions

What is the fund’s longer-term track record? A higher-performing long-term record (over five or 10 years) is better than a lower one. The fund’s long-term record is your best gauge to how well it may perform in the future. Has the fund done well only in the last year or two? A fund that has outperformed only recently may eventually revert to its long-term record. Investors often chase hot performance, then end up buying high and almost inevitably selling low. What does the fund charge for investing? Is there a sales load? It’s easy to avoid a sales load, but virtually all mutual funds charge an expense ratio to cover the ongoing costs of the fund and generate a profit.

For the average small investor, mutual funds can be a smart and cost-effective way to invest. Talk to your financial manager or a reputable company to see what works best for you.

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