Staring down 2010, the economy seems to be in turmoil with uncertainty prevailing in the stock market and returns on investments being riskier than ever. Investors are considering alternative investments such as mutual funds to keep their portfolio of individual stocks rather balanced. However, as the mechanisms of the capital markets have undergone through major changes due to the large quantity of money infused to the mutual fund investments, investors should consider a lot of factors when planning such investments.
Generally, mutual funds aim at achieving the highest possible capital gains for the shareholder by taking advantage of investment opportunities in global capital markets. To achieve that, fund managers invest primarily in large-cap funds, oriented in countries with a prospect of sustainable economic development. One of the major advantages of mutual funds is that they are multiple investments that trade off losses in the same portfolio. This means that if one stock is underperforming, the other stocks in the portfolio can make up for it. In this way, the risk is decreased and there is a better chance for higher returns on investment.
Equity Mutual Funds (EMT) invest pooled amounts of money in stocks of publicly listed companies. Based on the market capitalization of the stocks, equity mutual funds are classified into large-cap, mid-cap and small-cap funds, and in effect, they represent ownership (equity) of the stockholders in the company in the aim to see the market value of the company increase over time.
In 2010, global capital markets are likely to look very diverse than the previous years, for the most part because private equity and hedge funds entice a growing number of investors. As equity fund managers employ a variety of stock picking techniques when making investment decisions for the portfolios of their clients, they have to face major market drivers and operational challenges deriving from the approaching retirement of the baby-boom generation. Managed consumption substitutes for long-term accumulation of capital and in this context, fund managers face the altering dynamics of capital markets.
Pros of investing in EMT in 2010
The impressive growth of the mutual funds sector is mostly explained by the massive investing in securities with large capitalization. Large cap securities can absorb the money flow and have a greater liquidity when investors want to trade off a certain position. Aging populations are one of the key drivers of this growth as they are getting prepared to retirement, turning silver into gold.
Emerging markets are another reason to invest in EMT in 2010. Given the high barriers to entry in the capital markets and the strictly regulated environment, radical changes are unlikely to occur soon. This allows emerging markets to offer growth opportunities to fund managers, who need to adjust their business models to take advantage of these largely unexplored markets in 2010.
Cons of investing in EMT in 2010
In spite of the positive prospects, there are specific dangers related to equity mutual fund investments. These are mostly related to the diversity of investors as typically, many investors invest in diverse funds that, however, invest in the similar type of securities. In this context, neither the portfolios are diversified nor fund manager achieve better investment returns for their clients, although they undertake higher risks. In this aspect, investors need to choose different groups of equity mutual funds that invest in large-cap securities or in growing shares with average capitalization.
In general, equity funds require good investment strategy because only when they are strategically placed they can offer the highest returns. In this context, investors need to have a good understanding of the pros and the cons involved, not only in equity mutual funds in particular, but in mutual fund investing in general. For example, mutual funds offer diversification, are professionally managed by fund managers and analysts, come in many varieties and styles that can match any investor profile and build a diversified portfolio, have low minimums, and offer automatic reinvestment through capital gains and dividends. Moreover, they are easily liquidated, transparent and have historical records. On the other hand, in their cons one can suggest their fluctuating returns, the risk of over-diversification, the panic-selling that causes the stock values to depreciate sharply, and the fact that mutual funds offer no guarantee. Therefore, in any case, when buying an investment, investors should weigh the advantages offered and make sure that they outweigh the disadvantages, especially when it comes to strategically sensitive investments like equity mutual funds.