- March 24, 2020
MANAGERIAL FINANCE 1
Advantages ofMutual Funds over Company Stock
Mutual funds are advantageous over common stock for various reasons.It is for this reasons that they are popular among investors. Theadvantages can be divided into three main groups namelydiversification of the portfolio, lower costs and convenience(Haslem, 2003). According to most investors, mutual funds are populardue to the ability to diversify the stock portfolio according to thepreference of the investors. This involves the identification andpurchase of different stock of companies that operate in varyingsectors of the economy. In such cases, risks in the stocks arediversified away. Any additional risks that cannot be diversifiedaway are classified as systematic risks. They are also known asmarket-wide risks. The diversification of stock portfolios spreadsthe risks thereby limiting the level of losses that an investor mayface (Haslem, 2010).
Investors are likely to choose mutual funds due to their convenience(Haslem, 2010). The process involves the identification ofportfolio’s asset location and the identification of individualstock that meets the needs of an organization are regarded asessential components the mutual funds. The investor gains theadvantage of being able to monitor the progress of the stockportfolio. It is, therefore, important to ensure that the investmentis not lost in the first place (Haslem, 2003). The mutual fundsprovide the investors with the opportunity to avoid the complexscenarios that come with the decision-making process. The mutualfunds are tailored in a way that they offer a variety of portfoliosfor the investors to choose from (Haslem, 2010).
Under most circumstances, it is evident that the trading costsrelating to the purchase and sale of company stocks are relativelyhigher for the investors (Haslem, 2010). This calls for alternativeactions to deal with the price issues. However, the mutual fundscreate a scenario in which the risks of business operations arespread across all investors in a particular product. Ultimately, thecosts of services are lowered for each investor.
Advantages andDisadvantages of Bledsoe Large-Company Stock Fund over Bledsoe S&P500 Index Fund
Various advantages can be attributed to the actively managed funds. These benefits enable the fund to outperform the market across allfronts. With regards to the scenario under consideration, it isevident that the managed funds have given better results than themarket for the last ten years. However, the significant disadvantagethat can be attributed to this scenario is underperforming themarket. This is experienced in instances whereby the market hasperformed better than the managed funds. Several individual managedfunds do not have better outcomes in comparison to the market for asubstantial period. Investors are likely to face a series of problemsin their quest to find stocks that will outperform the market.Finally, beating the market may become a daunting task because of thechallenges associated with the management of fees that are usuallylevied against the fund (Northcott, 2009).
Volatility ofBledsoe Small-Cap
The returns from Bledsoe Small-Cap are volatile due to the high risksthat are related to such investment portfolios. Despite thevolatility of the financial instrument, the returns are usually high.For an investor, the possibility of earning additional returns is anattractive venture, and they are willing to face enormous risks(Northcott, 2009). In case the investment overcomes the hazards, thenthe investment is likely to bring huge returns to the investors. Thehigh expense rate is associated with the high risk related to suchinvestment decisions. It does not have an effect on the decision toinvest in any stock portfolio.
The role ofmutual funds as a financial instrument has increased over the years.The additional focus is attributed to the advantages that investorsare able to derive from the stock portfolio. The diversification andavailability of a variety of products also make the mutual funds morepopular than the common company stocks (Haslem, 2003).
Sharpe ratiorefers to the risk-adjusted return on investments. It measures theaverage return earned over risk-free rate per unit of the total risk.
Sharpe ratio =(Mean portfolio return − Risk-free rate)/Standarddeviation of portfolio return
Haslem, J. A.(2003). Mutual Funds: Risk and Performance Analysis forDecision Making. Oxford: Blackwell Pub.
Haslem, J. A.(2010). Mutual funds: Portfolio structures, analysis,management, and stewardship. Hoboken, N.J: Wiley.
Northcott, A.(2009). The mutual funds book: How to invest in mutual funds& earn high rates of returns safely. Ocala, Fla: AtlanticPub. Group.