Top 8 Benefits of Mutual Funds
The Top Advantages of Investing in Mutual Funds
Some of the key benefits of mutual funds include simplicity, cost, diversification, and professional management. These and other benefits make mutual funds the first and best choice of investment for the do-it-yourself investors, as well as professional money managers.
If you are a beginner and want to know why mutual funds are a good fit for your investment needs, or if you are an advanced investor and need a reminder of why mutual funds are best-suited for your financial goals and lifestyle, here are some of the many benefits you need to know.
Here are 8 of the top benefits of mutual funds:
1. Simplicity: Mutual Funds Are Easy to Understand
Anything can be made into something more complex than it needs to be and mutual funds are no exception to this truth. However, mutual funds require no experience or knowledge of economics, financial statements, or financial markets to be a successful investor.
For beginners, here is a simple definition of mutual fund: A mutual fund is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types, called holdings combine to form one mutual fund, also called a portfolio.
In different words, Mutual funds can be considered baskets of investments. Each basket holds dozens or hundreds of security types, such as stocks or bonds. Therefore, when an investor buys a mutual fund, they are buying a basket of investment securities. Simple!
Yes, there are many things to know about mutual funds but compared to the broad world of financial products, mutual funds are quite easy to use and understand.
2. Accessibility: Mutual Funds Are Easy to Buy
Mutual funds are offered at brokerage firms, discount brokers online, mutual fund companies, banks, and insurance companies. Even beginning investors can easily open an account at a no-load mutual fund company, such as Vanguard Investments, and open an account within minutes.
3. Diversification: Mutual Funds Have Broad Market Exposure
One mutual fund can invest in dozens, hundreds, or even thousands of different investment securities, making it possible to achieve diversification by investing in just one fund. However, it is smart to diversify into several different mutual funds.
4. Variety: Mutual Funds Come In Many Different Categories and Types
As you grow your portfolio of mutual funds, you will want to diversify into various mutual fund categories and types. You can invest in mutual funds that cover the main asset classes (stocks, bonds, cash) and various sub-categories or you can even venture into specialized areas, such as sector funds or precious metals funds.
5. Affordability: Mutual Funds Have Low Minimums
Most mutual funds have minimum initial investment requirements of $3,000 or less. In many cases, if the investor initiates a systematic investment program, where they have a fixed dollar amount or fixed number of shares purchased once per month, the initial investment can be as low as $1,000.
6. Frugality: Mutual Funds Cost Less to Manage Than Other Portfolio Types
Costs as a percentage of assets in the portfolio are usually lower for an actively-managed mutual fund when compared to an actively-managed portfolio of individual securities. When you add up transaction costs, annual fees paid to a brokerage firm, and the cost for research tools or investment advice, mutual funds are less expensive than the typical portfolio of stocks. Other variables influence the cost of managing a portfolio, such as the amount of trading activity, the size of transaction, and taxes.
7. Professional Management: Mutual Funds Have a Team of Professionals Researching and Analyzing Investments So You Don't Have To!
Perhaps the greatest benefit of all is that investors can save countless hours of time, energy and frustration involved with the research and analysis required to find quality investments to hold in a portfolio. That's not to speak of the skill, desire and patience required to do a job well in any professional pursuit. Mutual funds enable investors to do more of the things in life they enjoy rather than spending time and energy on investment matters.
8. Flexibility: Mutual Funds Have Several Uses and Applications
All of the above benefits of mutual funds overlap into simplicity and flexibility. You can invest in just one fund or invest in a wide variety. Automatic deposit, systematic withdrawal, 401(k) plans, annuity sub-accounts, dividends, short-term savings, long-term savings, and nearly limitless investment strategies make mutual funds the best overall investment type for both beginners and advanced investors.
Bottom Line on Buying Mutual Funds
Since mutual funds are easy to understand and a smart investment choice for the majority of savers and investors, these security types are the most commonly held investments in 401(k) plans and IRAs. However, although mutual funds are relatively simple to use, they are not for everyone and investors should be careful to select the best funds that align with their goals and tolerance for risk.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.