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Why Mutual Funds?
During the past 20 years, mutual funds have dramatically changed the
face of investing by making financial markets accessible to everyone. Millions of people
have found that mutual funds are an ideal way to invest because they offer
instant diversification and professional investment management, among other things.
Before you choose to invest in mutual funds, it’s important that you understand how they
work. A mutual fund pools money from many different people who choose to invest because they
share the same investment objective. Each investor receives a proportionate share of the fund’s
investment returns, which may include dividends, interest, and capital gains or losses. Mutual
funds offer many advantages including buying power, tax advantages,
and convenience. They are also
highly regulated investment vehicles, with governing bodies like the Securities and Exchange
Commission (SEC) in place to protect investors.
Diversification
Diversification is one of the best ways to reduce investment risk. By owning a variety of different
investments, you greatly reduce the chance of losing some of your investment due to the poor performance
of a single company or industry. It is possible to build a well-diversified portfolio by selecting one
stock or bond at a time, but identifying, researching, and tracking investment opportunities requires a
substantial commitment of both time and resources. When you purchase a mutual fund, your investment is
automatically diversified across dozens and sometimes hundreds of different securities.
Professional Management
Few investors have the time or expertise to manage their personal investments. Instead, they
prefer to rely on the highly skilled professionals who manage mutual fund assets. Mutual fund portfolio
managers and analysts have the training, time and technological resources to analyze economic trends
and find the best opportunities to buy and sell securities.
Buying Power
By pooling the money of many investors, mutual funds make even the most expensive securities
affordable. Mutual funds buy securities in much larger quantities than most individual investors
could. This enables them to negotiate better prices and pay lower brokerage commissions as a result.
Tax Considerations
Investors normally pay income tax on dividends and taxable interest distributions from mutual
funds each year. In addition, capital gains distributions are taxed as either short-term or long-term
gains, depending on how long the securities were held by the fund. This can create a tax burden for
investors who are not investing in tax-advantaged accounts like IRAs, qualified retirement plans or
annuities. In fact, the average stock fund investor loses up to 3% of total return in taxes each
year!1
Fortunately, tax-managed mutual funds take active measures to reduce investors’ tax liabilities, a
particularly important feature for people in higher tax brackets. The managers of tax-managed funds keep
portfolio turnover low, invest in companies that pay few or no dividends, sell depreciated securities
to offset capital gains, and sell shares with a higher cost basis first to reduce capital gains
liability. Finally, any liability incurred is divided proportionately among all shareholders. To
learn more about Armada’s Tax Managed Equity Fund, click here.
If you are in a top tax bracket and would prefer to avoid paying current taxes altogether, mutual
funds can help. Tax-free bond funds and tax-free money market funds generally allow you to avoid paying
federal income tax on your earnings. Income from some funds is exempt from both federal and state
taxes.
Convenience
Investing in mutual funds is easy and convenient. You can buy, sell, or exchange shares on any day
through the mail, over the telephone, or via the Internet. In addition, at Armada Funds investors can
set up a Planned Investment Program (PIP) and automatically invest in the mutual fund of their choice
by periodically transferring money from their bank account. Tracking account performance is a snap with
easy-to-read quarterly account statements.
1 Source: KPMG Peat Marwick LLP, An Educational Analysis of Tax-Managed
Mutual Funds and the Taxable Investor.
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