There are vast differences between large investment companies and the smaller ones in terms of fund size, return performance and the management team. How stock investors could benefit from investing through a large stock mutual fund? Just to name 3 key advantages here for investors’ reference.
1. Lower Expenses for Diversification
The more obvious advantage of an investment fund rests on the mere fact that it has much more capital than any but a few individuals own. It can diversify into a reasonable number of stocks with reduced percentage of expenses over your total investment sum.
An investor wanting to reduce the gamble in owning common stock must hold stock in a good many companies. Momentarily ignoring the existence of investment companies, suppose a man decides that for adequate diversification he should own stock in fifty companies, and for the companies he selects the average price per share is $30. Conceivably he could buy ten shares in each company at a total cost of $15,000, plus at least $3,000 expenses.
In return for his money, the first things he gets back are fifty stock certificates, which he must keep safe. When he sells a certificate at any time in the future Uncle Sam requires that he know when he bought it and the cost. Also, in the course of a year he will receive some 200 dividend checks, for a total of perhaps $60. The whole thing sounds silly, doesn’t it?
This example suggests three negative points about an investor’s obtaining diversification without using an investment company:
(A) He must pay out at least a few thousand dollars, and not many investors start with that amount of money.
(B) The expenses incurred in making small, direct purchases of stock may be higher than on the same total amount bought through an investment company, especially if a buyer figures in the fees for later sale of the stock.
(C) Even if an investor has capital enough to buy many times 10 shares in each of fifty or more companies, he still takes on a lot of work in selecting and keeping track of so many companies, and in handling his certificates and dividends.
2. Professional Investment Manager
Another advantage of having considerable capital in one pool under an investment fund is that a large fund can afford to pay the salaries of a competent portfolio manager and research deputies. Aside from the sales charge, most of the expense incurred in a typical investment company is the fee paid to the group responsible for keeping the fund invested. Usually this fee is fixed at a rate equivalent to 0.5 to 1 per cent of the fund’s assets each year. Suppose a fund’s capital is a mere $500 million; 0.5 per cent of this is $2.5 million, which the fund can pay for its investment managers, assistants, and operations expenses. A fund far smaller than this may be able to hire a skilled manager, because he expects a rapid growth of the fund’s assets, and consequently of his management fee. Or the same management organization may be in charge of more than one fund, with some of the assets of each fund invested in stock of the same companies, thus reducing the work for each fund.
It appears that in 2005 the investment companies with the best performance records are apt to have total assets of at least $300 Billion either in one fund or in a group of funds under the same management.
3. Fund Maturity and Track Records
Large size also implies maturity. It is practically impossible for a fresh investment company to accumulate $3 billion of assets, let alone 100 times that much, until either the fund has been in existence for a good many years, or else its management group has an established reputation strong enough to draw capital rapidly into a new fund. In 2005 most of the funds, or groups of funds, with $300 million assets or more, are at least twenty-five years old. So a fund with a good performance record is apt to have age as well as size. The giant of the industry Fidelity Investments was founded around 1930 by Edward Johnson II.
These comments on size may cause a reader to wonder: “How does a new investment company get started?” One answer is that many investors are so careless that a salesman with colorful prospectus can sell them shares in a fund with neither size, age, nor reputation. Or a buyer inclined to gamble may want to “get in on the ground floor,” whatever that means.
Of course, a fund can be large and still have poor or mediocre management. Large size merely gives a fund its perceived stability and the opportunity for a fine performance.