Why down Markets can be Good News for Mutual Fund Investors

The basic premise of making money in the stock market is buying low and selling high where the difference is your margin of profit. The stock market is a volatile marketplace and prices on certain stocks can vary widely in a short amount of time. For the little investor it can be a daunting task in attempting to keep up with the market. Mutual funds came into existence to allow small investors to receive the benefits of having their money professionally managed without the heavy cost of paying a personal money counselor.

A mutual fund is a long term investment vehicle. Historically they have given the small investor a better return than investing in individual stocks. Investing in mutual funds also removes the hassle of managing your portfolio daily. There are various mutual funds where an investor can either invest lump sum or in monthly installments. If you are going to invest for a long period of time a mutual fund that allows you to make irregular contributions may be more beneficial. However, the idea of dollar cost averaging works best with a regular monthly contribution. I recommend investing a fixed amount at fixed intervals no matter how the market is going. This will maximize your ability to dollar cost average over the long term. A fund that allows irregular contributions can be used to invest more by increasing your contribution at times when the market is low. In a down market mutual fund shares are also low. So by increasing your contribution in these times of a depressed market you are able to gain more shares increasing your overall holdings in that mutual fund. This will also allow you to dollar cost average down the cost of your mutual fund shares. This will lower your average cost per share of the mutual fund. Hopefully when you need to sell the share price is higher than your dollar cost average price of the share. Again buying low and selling high to obtain the maximum gain possible. So yes investing heavier in your mutual fund in times of a down market can increase your profit margin by allowing you to average down the per share cost at a quicker rate.

Common stock mutual funds are susceptible to market influences as any other common stock. Also mutual fund performance varies widely. There are various types of funds that are more aggressive and riskier than other more stable funds. So you are not totally free from investigating before investing. However, with the selection of a reliable fund that reflects your investment goals you can worry less about your investment more than you ever would be able to do if you managed your own portfolio.