The purpose of mutual funds, like any for-profit enterprise, is to provide a product or service people need, for a fee. Mutual funds provide several important benefits to small investors: diversification, professional management, strategy, low cost, access to specific markets and ease of investing. Most importantly, they help investors achieve their financial objectives by making them money.
The benefits of diversification are well known: to protect against individual security risk. Mutual funds pool investors’ money and invest in a diversified portfolio of stocks and/or bonds to minimize risk.
Few people know how to select securities, or have the time to do it. Mutual funds are managed by professional money managers—individuals, teams or investment management companies—who are trained in security selection and portfolio management.
Every fund has a stated investment objective: growth; growth and income; value; aggressive growth; small caps; and so on. Investors can choose a fund that meets their investment objective, goal and risk-tolerance level.
Because of the economies of scale, mutual funds can transact business at a much lower cost than individual investors, passing the savings on to the shareholders.
Access to Specific Markets
It’s easy to buy 100 shares of Wal-Mart or Home Depot; not so with foreign securities, commodities or specific segments of the market such as junk bonds, foreign bonds, bank loans or preferred stocks. As large institutional clients, mutual funds have substantial clout in getting priority access to hard-to-get securities.
Ease of Use
A mutual fund can be traded with the click of a mouse.
In reviewing the advantages, investors should not overlook the benefit to the other side: sponsors and sellers. Mutual funds are very profitable to their sponsors—brokerages and mutual fund companies. Selling them is a great way to make a comfortable living for an army of stockbrokers, financial planners, investment advisers and other professional peddlers.
Fierce competition forces mutual fund families to offer a fund of every flavor to keep investors from leaving. There is just not enough talent to manage all these vast pools of money. The end result: Mediocre performance, inappropriate recommendations and frequent switching (inducing an investor to sell a fund in one family to buy another fund in another family to generate a commission) are common investor complaints.
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.