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Home > Definitions & Designations > An Introduction to Mutual Funds

An Introduction to Mutual Funds

Money Manager | Monday, December 27th, 2010

Mutual funds have become a very popular investment over the past twenty years. On the average, about half of the households in the United States currently invest in them. Mutual funds used to be a somewhat obscure type of financial investment. However, starting in the 1980s and continuing throughout the 1990s, these investments produced record returns for many investors. As a result, many people started to become more interested in mutual fund investments. Although there were mutual fund scandals in 2003, these investments continue to be extremely popular today.

Advantages of Mutual Funds

Diversification is one of the most popular advantages of mutual funds. When you purchase mutual funds, you’re actually benefitting from a certain level of diversification, without the need to worry about picking individual funds. Although purchasing just a single mutual fund might not offer enough diversification to protect against a sector or industry price drop, it still provides a safer investment as compared to purchasing stock in a single company. Investor transaction costs are also low, because mutual funds are able to leverage their large selling and buying size to lower costs. They also allow investors to use a monthly purchase plan, instead of requiring a large sum of money to be saved in order to purchase investments which have a higher cost. They provide a great deal of flexibility, since you can get in and out of a mutual fund quickly and easily. Mutual funds are also a great idea for the person who doesn’t have a lot of investment experience, since mutual funds are controlled and researched by professional money managers.

Disadvantages of Mutual Funds

As with almost everything, there are also some disadvantages to investing in mutual funds. Although they are considered to be safer than buying individual stocks, they are still prone to fluctuations in value. There are also fees involved with mutual funds, which are assessed regardless of how well the fund has performed. Mutual funds also tend to keep a lot of cash on hand, because of the need to remain liquid. However, when cash is kept available within the fund that means it’s not invested, which means it’s not busy earning you more money. It can also be difficult to compare sales growth, P/E ratios and earnings per share between different mutual funds.

The Popularity of Mutual Funds

So, why have mutual funds become so popular among investors? Most people who invest in them are looking for something that will produce better returns than leaving the money in a savings account, but which is perceived to be easier and safer than purchasing individual stocks. Many people feel that a mutual fund is a good way for an average person to invest money for their future. When purchasing a mutual fund, it’s important to shop around until you find one that you feel will best suit your needs. In many cases, a mutual fund can be a great component of an overall investment plan. However, not all mutual funds will be equally advantageous or profitable. In the end, it’s up to you to decide whether they are the right kind of investment for you.

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