When you invest in a mutual fund, your
money is pooled with other investors' money and used to purchase stocks, bonds, or other
types of securities. The person who decides when and what to buy or sell is known as the
fund manager. The fund manager will try to make decisions that coincide with the fund's
common objectives or strategies.Convenience.
Administrative tasks or recordkeeping (trades, dividends, stock plits, etc.) are handled
by the fund. You keep track of only one statement -- the one that the fund sends you.
Mutual funds accept initial and subsequent investments as low as $50. This is a great
incentive for investors who have a limited amount of money to start with. And most funds
make it easy to start an automatic investment plan when you set up an account -- another
method to help investors stay disciplined. Most funds will let you exchange, buy and sell
shares, or change distributions options over the phone, through the mail, and even online.
By holding a pro rata share of the portfolio, you'll be entitled you to any gains or
losses that occur within the fund. So when the fund has a good year, you'll receive
distributions for each share that you own -- normally as capital gains or dividend income.
There are many benefits and drawbacks to investing in mutual funds. Let's take a look a
some of them.
Low costs. Mutual fund managers often sell thousands of securities at a
time. This qualifies them for lower transaction costs -- discounts that are passed
on to shareholders in the form of lower fees and costs.
- Professional Management. Mutual funds are managed by fund (or
portfolio) managers and research teams whose full-time jobs are to search for investments
consistent with the funds objectives. This means analyzing financial statements, meeting
with company CEOs and managers, or visiting with customers -- types of research and
expertise an individual investor couldn't expect to achieve alone.
- Diversification. The primary goal of any investor is to minimize risk.
Mutual funds do this by offering instant diversification. Most funds hold a variety of
stocks and bonds from different companies across numerous sectors of the economy. Having
such a broad exposure means your money is better protected if a major drop should occur in
one part of the portfolio. And with so many styles of funds available today, there is a
fund for every investor's needs.
- Liquidity. It's very important that your money is readily available
should you need it. Full or fractional shares can be redeemed for a specific amount of
cash (such as $500) -- this is something you might not be able to do if you just own
Public Record. As an
investor, your fund company will keep you informed through quarterly, annual, or other
detailed reports. Historical information about the fund or fund manager is readily
available through a variety of channels -- online, newspapers, fund literature, etc.
Mutual funds continue to abide by a high standard of disclosure.