Top Reasons to Buy a Mutual Fund

The Benefits of Buying Mutual Funds

buying mutual funds
Find out the basic reasons for buying mutual funds.. Getty images

There are many reasons to buy a mutual fund. We narrowed down the long list to 10 reasons that mutual funds can be a good investment choice for you.

In no particular order, here's why you should consider buying mutual funds:

1. Mutual Funds Offer Diversification

The beauty of a mutual fund is that you can buy a mutual fund and obtain instant access to hundreds of individual stocks or bonds. Otherwise, in order to diversify your portfolio, you might have to buy individual securities, which exposes you to more potential volatility.


2, Mutual Funds are Professionally Managed

Many investors don’t have the resources or the time to buy individual stocks. Investing in individual securities, such as stocks, not only takes resources but a considerable amount of time. By contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund.

3. Mutual Funds Come in Many Varieties

A mutual fund comes in many types and styles. There are stock funds, bond funds, sector funds, target-date mutual funds, money market mutual funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index mutual funds). The availability of different types of mutual funds allows you to build a diversified portfolio at low cost and without much difficulty.


4. Mutual Funds Have Low Minimums 

Many mutual fund companies allow investors to get started in a mutual fund with as little as $1,000. Schwab’s mutual fund family has a minimum of $100 for many of their mutual funds.

5. Systematic Investing and Withdrawals with Mutual Funds

It is simple to invest regularly in a mutual fund.

Many mutual fund companies allow investors to invest as little as $50 per month directly into a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service.

6. Mutual Funds Offer Automatic Reinvestment

An investor can easily and automatically have capital gains and dividends reinvested into their mutual fund without a sales load or extra fees. Unless you are looking for income (i.e. dividends separated and deposited into cash for income reasons), you'll want to choose the option to reinvest dividends and capital gains. This will take advantage of compounding interest, which essentially means that the interest, dividends, and gains will go to buy more shares of your mutual funds, rather than the cash coming out and being deposited into a separate account.

7. Mutual Funds Offer Transparency

Mutual fund holdings are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for.

Investors can also see the underlying securities (stocks, bonds, cash, or a combination of those) that the mutual fund portfolio holds. All of the information you need to know, plus some you don't need for investing, will found in the mutual fund prospectus, which can easily be found on the mutual fund company's website.

8. Mutual Funds Are Liquid

If you need to withdraw money from your brokerage account, you can get cash from most mutual funds within a few days. If you want to sell your mutual fund, the proceeds from the sale are available as soon as the day after you sell the mutual fund. Some mutual funds have a "settlement" period of up to three days. But this level of liquidity (quick access to your money), is much better than some investment assets, such as real estate.

9. Mutual Funds Have Audited Track Records

A mutual fund company must maintain performance track records for each mutual fund and have them audited for accuracy, which ensures that investors can trust the mutual fund’s stated returns. Mutual fund companies also offer a prospectus for each fund, as well as semi-annual or annual reports. These documents provide a wealth of information about how the fund invests, the amount of assets under management, the internal fund expenses, and more.

10. Safety of Investing in Mutual Funds

If a mutual fund company goes out of business, mutual fund shareholders receive an amount of cash that equals their portion of ownership in the mutual fund. Alternatively, the mutual fund’s Board of Directors might elect a new investment advisor to manage the mutual fund. However, because mutual funds have market risk can (and often do) fluctuate in value. This means that, in some cases, an investor can end up with less money than they initially invested. But this market risk is also what enables investors the opportunity to grow their wealth over time. In different words, "safety" is a relative term. If you're looking for a guarantee or safety of principal, mutual funds may not be the best choice for you.

While there are a plethora of investment options (individual stocks, ETFs, and closed-end funds, to name a few) a mutual fund can offer a simple, efficient way to invest for retirement, education or other financial goals.

Continue Reading...