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Individual Securities or Funds
Should an investor invest in individual securities or use funds? Mutual fund stocks and bonds have always been very popular among investors and in these they have invested record amounts throughout the years. The advantages of the mutual funds are the use of professional managing service, diversification, and freedom to invest small amount s of money and to have the ease to sell and buy at will.
For many investors these advantages cover possible mutual fund deficiencies. Mutual funds can be for them the most practical way of buying many types of securities, including bonds that are sold in high denominations ($50,000 at least), as well as certain kinds of mortgage-backed bonds, agency bonds and some municipal issues.
One of the advantages of the mutual fund bond is that the investors avoid having to understand the complexity of certain types of individual bonds, such as mortgage-backed bonds, zero-coupon bonds, convertible issues, and derivative securities. Mutual funds specialized in said type of bonds allow the investor own many different kind of complex bonds. Equally, avoid having to decide in which class of individual stock to invest when choosing an equity mutual fund.
Diversification achieved by mutual funds minimizes unexpected losses effects coming from an individual stock or bond in a portfolio. There again the funds’ professional managers have more access to information about different issues. This is why managers react faster and sooner when buying and selling the mentioned securities.
In some cases, however, a strong discussion comes about over buying individual securities over those of mutual funds. The rates of return on individual stocks and bonds are often greater than those earned from mutual funds. This commentary also concerns no-load funds because in addition to sales commissions, other fees, such as 12(B)-1 and operating fees reduce the mutual funds returns. By investing on individual securities one avoids paying such fees.
A study carried on by Malkiel during the period 1971-1999 about equity mutual funds performance, indicate that from one year to another funds could easily turn from being top-performing funds to under-performing funds. These phenomena occurred more during the ?80s than in the ?70s.
A major supporting argument to invest on individual bonds is to know whether they will be bought and kept until maturity to avoid the interest risk.
Changes in market rates of interest affect prices from individual bonds as well as those from bond mutual funds. Nevertheless, if you go through a period in which you do not need that extra money, you could invest on individual bonds with its corresponding maturity – depending on their individual needs- and forget about what?s going on with the market rates of interest.
This concept does not apply to mutual fund bonds. If market interest rates go up, a drop in NAV of share prices of bond funds occurs.
Some bonds such as treasury securities are easy to buy directly from the Federal Reserve Bank and branches. By owning them you eliminate many of the fees that are charged by mutual funds, and therefore, increase its returns. Moreover, when you buy these bonds directly from the Federal Reserve Bank or branches you don?t pay any commissions.
Buying and keeping treasury securities has more sense than investing in Treasury bond funds. However, if you do not plan to keep such bonds until their maturity, the funds could be a better alternative.
If you have a small amount of money as to invest, mutual funds are the best alternative. A $2000 investment in stock funds offers a fraction of the portfolio of varied stocks, while the acquisition of individual securities that amount would only allow him to buy shares from a single equity company.
Investing in mutual funds is a good strategy if you don’t have any money to diversify your investments, nor the time, experience or the tendency to select and manage individual securities. Besides, a wide range of funds offer the opportunity to invest in the type of securities that could be hard to buy on your own, as an individual.