Why Investors Use Funds

As with all investment vehicles, mutual funds have their advantages and disadvantages.

Some advantages:

  • Professional Management: With actively-managed mutual funds, experienced professionals manage a portfolio of securities for you full-time, and decide which securities to buy and sell based on extensive research. A fund is usually managed by an individual or a team choosing investments that best match the fund’s objectives. As economic conditions change, the managers often adjust the mix of the fund’s investments to ensure it continues to meet the fund’s objectives.
  • Diversification: Diversifying one's investments can help reduce the adverse impact of a single investment. Mutual funds introduce diversification to your investment portfolio automatically by holding a wide variety of securities. Moreover, since you pool your assets 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—and at a fraction of the cost.
  • Variety: Within the broad categories of stock, bond, and money market funds, you can choose among a variety of investment strategies. You can focus on industry sectors, geographic areas, size of assets (small and mid-cap vs. blue chips), by risk levels, to name a few.
  • Low Cost: Funds hold dozens or even hundreds of securities, but and because they make many investments, their trading costs are lower. Investment management companies charge fees, usually collected annually. They may appear high, but are low compared to costs generated by an individual portfolio.
  • Liquidity: Mutual fund shares are liquid investments that can be sold on any business day. The price per share at which you can redeem shares is known as the fund’s net asset value (NAV). NAV is the current market value of all the fund’s assets, minus liabilities, divided by the total number of outstanding shares.
  • Convenience: Mutual funds make it very easy for investors to acquire or dispose of shares. You can purchase or sell fund shares directly from a fund or through a broker, financial planner, bank or insurance agent, by mail, over the telephone, or online.  

Some disadvantages:

Mutual funds also have features that some investors may view as drawbacks, such as:

  • Costs Despite Negative Returns: Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs.
  • Lack of Control: Investors typically cannot determine the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.
  • Price Uncertainty: With an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour — or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order.

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