There are many reasons to buy a mutual fund, including diversification, systematic investing, and accessibility. We narrowed down the many benefits of mutual funds to 10 reasons these investment securities can be smart tools for your financial objectives.
- Mutual funds offer easy diversification for any investor—buy one fund and instantly access many individual stocks and bonds.
- They are also professionally managed and have low entry requirements, making it easier for any investor to jump in.
- There are many other benefits of mutual funds, including their transparency, liquidity, and audited track records.
Mutual Funds Offer Diversification
Diversification may be the greatest benefit of mutual funds. The beauty of investing in mutual funds is that you can buy one 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.
Mutual Funds Are Professionally Managed
Many investors don’t have the resources or time to buy individual stocks. This is where professional management is valuable. 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.
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 a low cost and without much difficulty.
Mutual Funds Are Accessible
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. And since mutual funds can be easily traded, the combination of low cost and ease of use makes them accessible.
Many Offer Systematic Investing and Withdrawals
It's simple to take advantage of systematic investing with mutual funds. 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.
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.
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 be found in the mutual fund prospectus, which can easily be found on the mutual fund company's website.
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 two days. But this level of liquidity (quick access to your money), is much better than some investment assets, such as real estate.
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.
Mutual Funds Build Wealth
Mutual funds are the best way for most people to build wealth. Not everyone can become a successful business owner or rise to the top ranks of a large corporation. But saving and investing for the long term with mutual funds can be accomplished by almost anyone.
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.