Stock Funds: Are They Right for Your Portfolio?

Investing in stock funds is a popular way for investors to get involved in the stock market. While these funds do have a few advantages, they are not always a great investment. One of the biggest disadvantages of investing in a stock fund is that you are going to have to pay several different types of costs.

Costs

First, you will be required to pay a sales charge on the front end of your purchase. Many times, this will be around five percent of the total value of your purchase. This charge is levied in order to compensate the brokers that sell the shares of the fund to you. In addition to paying sales charges, you are going to have to pay to cover the cost of the fund management as well. This is known as the expense ratio. Part of the expense ratio is going to go towards paying the salaries of the fund managers. Another part is going to go to paying for administration expenses such as the rent for the headquarters of the fund.

Some mutual funds are also going to charge you distribution fees. These fees are also referred to as 12b-1 fees. Users are charged these fees in order to cover the costs of advertising and distribution in order to bring in new customers. This does not necessarily do you any good as an existing investor in the fund, but it does help the fund get more customers. The larger customer base builds a larger fund and that can be beneficial to you as an investor in the end.

Less Opportunity for Gains

When you invest in a diversified portfolio, such as a stock fund, you are not going to be able to realize the same amount of gains that you could if you were to invest directly in stocks. A diversified portfolio is always going to be held back a little bit by the stocks that are not performing well. This means that if you are the type of investor that wants to post very large gains, you may want to invest directly in stock instead of stock funds.

Confusing

In some cases, it can be difficult to understand what the objective of the fund is. There are so many different mutual funds out there that it will be difficult to find one that suits your investment needs. Every stock fund is going to have a different approach to investing in the stock market. For example, you might find one that likes to invest in growth stocks, while another stock fund might want to invest in value stocks. Without doing a lot of research on the strategy of the fund, it can be difficult to determine what the investment strategy of each fund is. This means that you are going to have to do practically as much research about the fund as you would if you were investing directly into an individual stock.