Unit 3 investing making money work for you answers

Mutual funds offer diversified holdings in many different industries or types of securities. Investing in a mutual fund is a good way to avoid some of the complicated decision-making involved in investing in stocks. Though mutual funds still charge manage fees, the cost of trading is spread over all mutual fund investors, thereby lowering the cost per individual. Mutual Funds vs. Stocks Mutual funds offer an individual investor exposure to many stocks, not a few.

The stocks in the fund are selected and managed by professional portfolio managers who do all the work of buying and selling with the goal of meeting or beating the performance of a specific benchmark. Mutual funds have fees, which can be very low if the fund is passively managed and considerably higher if it is actively managed. The Basics of Mutual Funds Mutual funds pool money together from a group of investors and invest that capital into different securities such as stocks, bonds , or short-term securities.

Each mutual fund has a different investment objective which drives the strategy and selection of investments within the fund. Each fund has a money manager responsible for the fund, and the manager's objective is to generate income for investors by investing portfolio assets and protecting the portfolio's value.

Mutual funds can hold many different securities which makes them very attractive investment options. Actively managed funds require a portfolio manager who constantly updates their holdings, while a passively managed fund's portfolio is built on a buy-and-hold strategy. Advantages of Mutual Funds There are several specific reasons investors turn to mutual funds instead of managing their own portfolio directly.

The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs. Diversification Ask any investment professional, and they'll likely tell you that one of the most important ways to reduce your portfolio risk is through diversification. Instead of investing in just one company, industry, or investment vehicle, there's benefit to spreading your investments across different holdings to minimize potential losses.

The less correlation your investments have, the lower the risk of them all dropping at the same time. Many experts agree that the benefits of diversification are mostly realized when a portfolio holds stock in at least 20 different and differing companies. At that point, a large portion of the risk associated with investing has been diversified away.

The remaining risk is deemed to be systematic risk that will impact any security you're holding. Since most brokerage firms charge the same commission for one share or 5, shares, it can be difficult for an investor to buy into 20 different stocks. In addition, it's a delicate balance weighing the benefits of varying correlation coefficients with the long-term projected success of a company.

That's where mutual funds come into play. Mutual funds offer investors a great way to diversify their holdings instantly. Unlike individual stocks, investors can put a small amount of money into one or more funds and access a diverse pool of investment options as a single mutual fund may be comprised of dozens of different securities. Mutual funds also invest in a variety of different sectors.

Others may specifically target companies with smaller market capitalization or specific industries like technology, health care, or raw materials. Again, if you were to try to match this through individual stocks, you'd have to spend a lot of time selecting your investments. Convenience Another reason investors choose this investment option is the convenience of mutual funds. When deciding how to allocate the equity portion of your portfolio , you can defer that decision to an investing expert rather than buy individual shares yourself.

Some investors find that buying a few shares of a mutual fund that meets their basic investment criteria is easier than researching companies to invest in and directly purchasing their stock. Investors use mutual funds when they prefer to leave the research and decision-making up to someone else. This convenience translates into relying on a money manager to help determine your portfolio's asset allocation. People devote their entire careers to learning and understanding the stock market, so it's often more beneficial to rely on their expertise than attempt to learn the industry on your own.

Many mutual funds also offer investors a easy opportunity to buy into a specific industry or to buy stocks with a specific growth strategy. Here are several examples of the different types of easily accessible mutual funds: Sector funds invest in companies within a specific industry or sector of the economy. Growth funds focus on capital appreciation through a diversified portfolio of companies that have demonstrated above-average growth.

Value funds invest in companies that are undervalued and are normally held by long-term investors. Index funds allow investors to track the overall market by constructing a portfolio that tries to match or track a market index. Bond funds generate monthly income by investing in government and corporate bonds as well as other debt instruments. Costs The costs of frequent stock trades can add up quickly for individual investors.

Gains made from the stock's price appreciation can be canceled out by the costs of completing a single sale of an investor's shares of a given company. With a mutual fund, the cost of trading is spread over all investors in the fund. Therefore, the mutual fund capitalizes on economics of scale and often results in a lower cost per individual than if those individuals were to self-purchase the investments.

Many full-service brokerage firms make their money off of these trading costs, and traders may find they are charged for every buy or sell order they place. Neither Prudential Financial, Inc. Variable annuities are distributed by Prudential Annuities Distributors, Inc. All are Prudential Financial Inc. PFI companies, and each is solely responsible for its own financial condition and contractual obligations.

Group Insurance coverages are issued by The Prudential Insurance Company of America, a Prudential Financial company, Newark, NJ For additional important information about the products, services and companies that make them available, please click here.

This web page is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings.

Clients seeking information regarding their particular investment needs should contact a financial professional. Prudential Financial, its affiliates, and their financial professionals do not render tax or legal advice. Please consult with your tax and legal advisors regarding your personal circumstances.

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