You may be a novice who wants to know why mutual funds can be a good fit for your investment needs. Perhaps you are an advanced investor and need a reminder why mutual funds may best suit your financial goals and lifestyle. Either way, here are some of the many benefits you need to know.
1. Simple: Mutual Funds Are Easy to Understand
Because they are easy, you can invest and succeed with mutual funds, no matter your skill level. They require no background in economics, financial statements, or financial markets.
For beginners, here is a simple definition of mutual fund: A mutual fund is a security type that lets investors pool their money into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types are called holdings. They combine to form one mutual fund, also called a portfolio.
Think of mutual funds as baskets of investments. Each basket holds dozens or hundreds of security types, such as stocks or bonds. When you buy a mutual fund, you buy a basket of investment securities.
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. Accessible: Mutual Funds Are Easy to Buy
You can buy mutual funds from brokerage firms, online discount brokers, mutual fund companies, banks, and insurance firms. Even novice investors can easily open an account in minutes at a no-load mutual fund company, such as Vanguard Investments.
3. Diversified: Mutual Funds Have Broad Market Exposure
One mutual fund can invest in dozens, hundreds, or even thousands of investment securities. This means you can diversify by investing in just one fund. However, it is smart to diversify into several different mutual funds.
4. Varied: Mutual Funds Offer Many Categories and Types
As you grow your portfolio of mutual funds, you will want to diversify into varied mutual fund categories and types. You can invest in mutual funds that cover the main asset classes (stocks, bonds, cash) and various sub-categories. You can also venture into specialized areas, such as sector funds or precious metals funds.
5. Affordable: Mutual Funds Have Low Minimums
Most mutual funds have minimum initial investment limits of $3,000 or less. In many cases, if the investor chooses a systematic investment program, the initial needed may be much lower. Some minimums can be as low as $100. Further investments may be lower than $100. If you invest through a 401(k) plan or other employer-sponsored retirement plan, there is no minimum to start.
6. Low Expense: Mutual Funds Can Cost Less to Manage Than Other Portfolio Types
Costs as a percentage of assets in the portfolio may be 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 often cheaper than the typical portfolio of stocks.
Certain factors may affect the cost to manage a portfolio of mutual funds. These include the fund's expenses, trading volume, size of transaction, and taxes.
7. Professional Management: Mutual Funds Have a Team of Pros Who Research Investments So You Don't Have To
Perhaps the biggest benefit of mutual funds is the time you save. By handing the work to a pro, you don't have to do the research and analysis needed to find the best holdings for your portfolio. You most likely lack the skill, passion, and patience needed to do the job well. Spend your time and energy on what you enjoy in life.
8. Flexible: Mutual Funds Have Several Uses and Applications
All the 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 almost all types of savers and investors, they are the standard options in 401(k) plans and IRAs. However, you should still be careful to choose funds that align best with your goals and tolerance for risk.