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With the range of investment options
available for the individual investor, it can be difficult to determine
which investment is right for you. With stock markets up one day and
down the next, many investors face the dilemma of whether to invest
directly in stocks or to use mutual funds as their investment tool. In
order to decide which approach best meets your needs, it is important
to consider some of the pros and cons of each of them.
Clearly, the answer will vary from
person to person, depending on such factors as: How much risk you are
comfortable with, how much money you have to invest, how knowledgeable
you are about financial matters, and how much time and effort you are
willing and able to devote to this task. Each approach to investing has
advantages and disadvantages. Here are some questions you should ask
yourself to help you make the assessment.

Do you have the knowledge, time or inclination to build your portfolio and monitor your investments yourself?

Mutual funds are managed by experienced
professionals who are well acquainted with the dangers and
opportunities that come with investing. They will make the day-to-day
buy and sell decisions about which stocks, bonds, or other securities
to invest in, thus relieving the investor of that responsibility. As
with all investments, mutual funds will not perform to expectations all
the time. To have the best chance of success, it is important to select
a fund manager with a quality management team and a good track record,
but even then, only a few funds will consistently outperform the market.
If you decide to buy stocks on your
own, you will have more control over what you are investing. But as you
will also have to devote more time and attention to your investments,
it is important to make a realistic assessment of your ability to
handle that responsibility.

It will take time and effort to
familiarise yourself with the basics of stock investing. You should
have a sense of how to analyse a company to be able to arrive at your
own independent judgment of its value and how that compares to its
current market price. You should certainly be prepared to spend time
reviewing your portfolio periodically and if you are a new investor or
not disposed to put in that amount of time, and even more during
periods of volatility, then you are better off in funds, which are very
convenient and generally require less attention. The alternative is to
manage your own portfolio of individual stocks and bonds. If you do not
have the knowledge, experience or inclination, then this may not be a
good idea.
It is very tempting to listen to all
the rumours and noise out there and appear to be selecting stocks. If
you are going to buy based on a friend’s hunch about which are the
“best” stocks and which are the ones to avoid, and substitute their
judgment for yours, then you are probably better off sticking to mutual
funds.

Do you have enough money to be able to create a diversified portfolio?

How much do you have to invest? Mutual
funds offer a clear opportunity for smaller investors who do not have a
lot of money to invest. In Nigeria, there are several funds that offer
low initial investments of N10, 000. If you want to build a reasonably
diversified portfolio of individual stocks on the other hand, you will
usually require a much larger sum.
Mutual funds can reach a wider
diversification than can be reached by individual stocks. Dividing up
your funds among a few stocks is not usually enough to cushion you
against a severe market downturn. By pooling several stocks as an
equity fund does, the risk of loss in investing is reduced. If one
company or sector performs badly, it tends to be balanced by other
companies that may be performing better. By owning a wide variety of
stocks across various sectors, you reduce your risk of loss.

There are
different types of mutual funds to choose from including money market
funds, bond funds and equity funds to suit different objectives. It is
important to note however, that individual stocks tend to have a
greater upside potential than most mutual funds; as with all investing,
you trade some risk for greater potential reward.
Mutual funds are considered to be among
the most liquid investments. As shares in a mutual fund can be bought
and sold any business day, it is easy for investors to have access to
their money, as the fund is always available to buy its own shares.
When you invest in individual stocks, you have to wait for a broker to
find a buyer for your shares; this could take several days or longer
particularly if the stock is not widely traded.

Mutual funds and stocks?

For those who would rather let
professionals handle things on their behalf, mutual funds are the
natural choice. At the other end of the spectrum are those who may want
a greater level of participation with their investing. For this group,
stocks will be the more attractive alternative. You do not have to
narrow down your choice to one or the other; indeed investing in a mix
of both mutual funds and individual stocks appears to be a good
compromise for the majority of investors. The over arching
consideration must be to adopt a long-term investment strategy and to
ensure that a diversified portfolio is built with clear financial goals
and objectives in mind.

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