A Guide to Mutual Fund Investing

Advantages of Mutual Funds

Diversification

A mutual fund, by its very nature, is diversified—its assets are invested in many different securities. When one investment is down another might be up. Holding a wide array of securities reduces your risk significantly. Moreover, since assets are pooled with those of other investors, a mutual fund allows you to obtain a more diversified portfolio than you would probably be able to comfortably manage on your own.

Ease of Use

In buying a mutual fund share, you own just one security rather than many, yet enjoy the benefits of a diversified portfolio of holdings, as well as a wide range of services. A portfolio manager navigates financial markets on your behalf, and account management and other services are provided to the shareholder. You also can arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by the fund, as well as automatic withdrawal from a checking account. Minimum investment requirements on many funds are low enough that novice investors can get started.

Low Costs

Mutual funds are cost efficient because they pool together the assets of many investors, allowing large transactions at a fraction of the cost available to individuals buying securities directly. This lets investors with a small or moderate amount of assets participate in a diversified portfolio. Large and small clients alike are entitled to the same levels of investment management expertise and service.

Professional Investment Management

With mutual funds, experienced professionals manage a portfolio of investments for you full time, deciding which securities to buy and sell based on extensive research. This is a service that few individual investors can afford to obtain independently. A fund is usually managed by an individual or a team choosing investments that best match the fund's objectives. As economic or market conditions change, the managers have the flexibility to adjust the mix of the fund's investments. These managers have instantaneous access to crucial market information and are able to execute trades on the largest and most cost-effective scale.

Recordkeeping

Fund managers decide what securities to trade, claim interest payments and see that your dividends on portfolio securities are received and your rights exercised. Those holding stocks and bonds directly have to do their own recordkeeping of purchases, sales, dividends, interest, short-term and long-term gains and losses. Mutual funds provide confirmation of transactions and associated tax implications to help you keep track of your investments and tax reporting.

Efficiency/Liquidity

By pooling investors' monies, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free and have relationships with brokerage firms. This is passed onto the shareholders in the form of lower fees. In addition, mutual funds are highly liquid, meaning it is easy to put money in or take money out of an account. Funds can offer same-day transactions, while buying or selling some individual equities or bonds can prove more difficult, and certificates of deposit carry penalties for early withdrawal.