WHY INVEST INTO MUTUAL FUNDS?

RISK

• Specific Risk · remember, the prime reason for investing into funds as distinct from individual securities is to benefit from risk spreading · but this will only eliminate the specific risk taken on through holding a single investment or a mere handful of investments (one company may fail and thus cause serious loss - but one failure in a portfolio of say 40 securities is bearable because it is likely that of the remaining 39 securities several will be performing at well above the average rate)
  
  
• Market Risk · investing into funds will NOT eliminate the "market" risk · this is the risk associated with investing in the stock markets of the world - shares can fall and rise in value "en masse" sometimes significantly - the causes of large stock market falls are many but may be summarised as the sudden downward reassessment of expected investment returns from shares - they are therefore perceived as expensive relative to say bonds or cash and possibly other forms of investment and there will be a heavy sell off · since 1945 and measured over any reasonable period of time, the large stock markets of the Western world have risen at a rate in excess of inflation (as experienced by most developed countries) - sometimes markedly so · but there have been certain times in the past when the markets have fallen sharply - October 1987 for example · at times like this all stocks fall albeit some more steeply than others · there is no escape unless you have been fortunate or clever enough to have sold immediately before the fall · since 1945 the markets have always recovered from such falls so that even those who bought immediately before a market setback still showed a positive return over the medium to long term · but the past is only indicative - there is no guarantee that at some point in the future there will not be a sustained fall in the markets
  
  
• Summary · specific risk can be substantially diversified away · there is no escape from market risk · there is an old adage - the higher the reward on offer, the higher the risk - any investment (or market) offering an abnormally high return must by definition hold a proportionately higher risk Fees and charges