Should an Investor invest in individual securities or use funds? 

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Should an Investor invest in individual securities or use funds?



Stock closed-end funds offer investors the opportunity to invest in diversified portfolios of different sectors of the economy and foreign countries, just like mutual funds. The advantages of both closed-end funds and mutual funds are the use of professional management, diversification, the freedom to invest small amounts of money, and the ease of buying and selling. For many investors, these advantages far outweigh their disadvantages. Decisions of which individual stocks to invest in are avoided by choosing equity mutual funds and closed-end funds.

An advantage of a closed-end fund over a mutual fund is that closed-end funds can trade at a discount to their NAVs. This is akin to buying a dollar’s worth of assets for less than a dollar. This strategy appeals to value investors, who have the patience to wait for the assets to rise in value.

Mutual fund managers can experience liquidity risk from excessive sales of shares by shareholders. Fund managers would have to sell some of their stock holdings to raise enough cash to be able to redeem the shares sold by shareholders. This does not happen in closed-end funds, allowing their managers to invest in less liquid investments, such as real estate and foreign company shares. Investing in individual stocks and closed-end funds allows investors to choose their purchase and selling prices during the trading day. Mutual fund transactions are enacted at the NAV price as of the close of the trading day. Similarly, there are no minimum investment amounts stipulated with closed-end fund investments as there are with mutual funds. An investor can buy or sell a single share or in round lots of shares.

However, in certain cases, a strong argument exists for buying individual securities over mutual funds and closed-end funds. Returns on individual stocks could be greater than those earned from mutual funds and closed-end funds owing to fees charged by the funds. This statement is true even for no-load funds because in place of sales commissions, other fees, such as 12(b)–1 and management fees, reduce the returns of mutual funds. By investing in individual securities, you avoid these fees. Closed-end funds do not charge 12(b)–1 fees, but management fees can be high. Investing in mutual funds and closed-end funds is a good strategy if you do not have enough money to diversify your investments and do not have the time, expertise, or inclination to select and manage individual securities. In addition, a wide range of funds offers you the opportunity to invest in the types of securities that would be difficult to buy individually.

Table 15–4 compares some characteristics of investing in individual securities versus mutual funds and closed-end funds.
Individual Securities Mutual Funds Closed-End Funds
Diversification Achieved only if a large number of securities is purchased Achieved with a small investment Achieved with a small investment
Ease of buying and selling Easy to buy and sell stocks at real-time prices during the trading day. More difficult to buy bonds Easy to buy and sell shares. Trades occur only at the closing price at the end of the day Easy to buy and sell liquid closed-end funds
Professional management No Yes Yes
Expenses and costs to buy and sell Brokerage fees to buy and sell Low to high expenses, depending on fund Low to high expenses, depending on fund
Tax planning Easier to predict income and plan capital gains and losses Can upset careful tax planning owing to unpredictable distributions of income Can upset careful tax planning owing to unpredictable distributions of income and capital gains




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