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“Remember, things are never clear until it’s too late.”- Peter Lynch

Why is investing in mutual funds best for beginners?

I can still recall reading articles on the weekends and late at night in an effort to comprehend business earnings reports. It wasn’t until I read the books “One Up on Wall Street” by Peter Lynch and “The Simple Path to Wealth” by John Collins that I realized I was making my investment path difficult for myself when investing in mutual funds might have made it simple.

Investing in mutual funds offers many benefits to investors. Mutual funds perform well financially and give you the power to diversify your portfolio and make it risk-free. If you are thinking of investing in a mutual fund, then read through this article to learn why investing in a mutual fund is the best way to invest your money to secure a comfortable future.

What is a mutual fund?

A mutual fund is a type of investment vehicle that pools money from a large number of investors and uses it to purchase securities such as stocks, bonds, cash equivalents, etc. The fund manager then invests the pooled funds in various financial assets in order to generate returns. 

Mutual funds are managed by professional fund managers who have years of experience in investing and know how to use their expertise to make smart decisions. This means that in addition to the returns generated from the underlying investments, mutual funds also charge fees for managing and distributing their products. 

Some of these costs are built into the fund’s expense ratio and others are charged directly by the fund manager as a separate fee.

Here are the four benefits of mutual funds:

• Greater diversification
• Lower risk and higher returns
• Tax benefits
• Peace of mind

Greater Diversification

Mutual funds allow you to invest in a wide range of investments, such as stocks and bonds, without having to go through the hassle of researching, buying, and selling each individual security. For example, if you wanted to invest in large-cap U.S. equities, there are over 7,000 options (including ETFs) available today. 

If you tried to do this yourself, it would take years or decades to find the right investments. The same is true for other asset classes, such as foreign stocks and bonds.

Lower risk and higher returns

Mutual funds are generally cheaper than buying individual investments directly. For example, Vanguard Total Stock Market ETF (VTI) has an expense ratio of just 0.04% compared to a typical online broker that charges around 1%. This makes a big difference over time, as you can see in the figure below:

If you invested $10,000 in VTI and its index over 10 years using Vanguard mutual funds, it would have grown up to $17,841.01. If you did the same with a typical online broker’s mutual fund options, it would have grown to only $16,288.

The fees are outrageous. You’ll spend a sizable portion of your growth on fees. You don’t want to see that in your portfolio. As per my mentors, choose mutual funds or ETFs with low fees, such as those offered by Vanguard, Schwab and Fidelity.

Tax benefits

Mutual funds are a great way to invest in tax-advantaged accounts like IRAs and 401(k)s. By investing in mutual funds, you can take advantage of things like the deductibility of your contributions, which will save you money on your taxes today. If you’re investing outside of these types of accounts, there are still some benefits to holding them inside a mutual fund, such as tax loss harvesting and capital gains distributions. 

Mutual funds are one of the most tax-efficient investment vehicles available today. This is so because managers of mutual funds must annually distribute dividends, capital gains, and interest. This means that you don’t have to worry about paying taxes every year on your investments; they are taken care of by the fund manager on your behalf.

Peace of mind

You can achieve peace of mind using mutual funds. They are well managed by professionals who can help you avoid mistakes and make better investments. You do not need to worry about choosing the right investments, rebalancing your portfolio, or deciding whether to sell assets that have depreciated (or appreciated). 

A further point to keep in mind is that mutual funds aren’t solely for retirement accounts. For instance, if my emergency fund is at its maximum, I would invest any additional cash in mutual funds.

Related: What Causes Stock Prices To Rise and Fall?

Mutual funds to the moon!

Mutual funds are a great way to grow your money while investing, and they give you the chance to play a part in helping pick which stocks to invest in. They might seem intimidating at first, but they are really not that hard. And once you get the hang of it, it can be a lot of fun playing with stocks (and not losing too much money).

What is your favorite mutual fund?

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