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Should I invest in mutual funds or individual securities?
Mutual funds offer many advantages that are particularly attractive, if you have a small amount to invest or if you don't have the time, experience, or inclination to manage your own investment portfolio. If you invest in an actively managed mutual fund, you get the benefit of the fund manager's professional expertise without the expense of hiring your own investment advisor.
Money invested in a mutual fund is fairly liquid. Also, the typical mutual
fund holds dozens and often hundreds of different securities. If you
purchase shares of a mutual fund, you benefit from instant diversification at
a relatively low cost. For instance, if you buy into an asset allocation fund,
your investment will automatically be spread across multiple asset
categories, even if you invest only a few thousand Rupees. Even with a
mutual fund that invests in only one type of investment, you still have a
small stake in many different securities. It would require a much larger
initial outlay of cash to purchase a portfolio of individual securities as
diverse as most mutual funds.
Should I invest my extra cash or use it to pay off debt?
You must decide how your money can work best for you. Compare the money you might earn on other investments with the money you would pay on your debt. If you would earn less on investments than you would pay on debts, you should pay off debt.
It would be best to use your extra cash to pay down the high-interest debt balance. The same principle would apply if you were to invest your extra cash in a certificate of deposit (CD), mutual fund, or other investment.
What is asset allocation and how does it work?
Asset allocation is the process of deciding how to divide your investment across several asset categories. Stocks, bonds, and cash alternatives are the most common components of an asset allocation strategy. The general goal is to minimize volatility while maximizing return. The process involves dividing your investment among asset categories that do not all respond to the same market forces in the same way at the same time. Though there are no guarantees, ideally, if your investments in one category are performing poorly, you will have assets in another category that are performing well. Any gains in the latter may offset the losses in the former, minimizing the overall effect on your portfolio.
Determining an appropriate asset allocation may be the most important single investment decision you make, because it will likely have more impact on your overall return than the selection of individual investments. Don't hesitate to get expert help if you need it. And be sure to periodically review your portfolio to ensure that your chosen mix of investments continues to serve your investment needs as your circumstances change over time.
