A Mutual Fund Has Its Selling Points as Well as Its Downsides

Piggy Bank

Credit: GourmetGiftBaskets

Mutual Funds offer a dynamic variety of choices, providing investors with a range of opportunities. There are thousands of mutual funds to choose from. Many investors choose mutual funds in their portfolios because these funds have some advantages.

What is a mutual fund?

It is a fund which an investment company pools from its investors and invests in stocks, bonds, and other securities. Each investor owns shares which are part of these holdings.

Why do mutual funds work?

  1. Professional management. Funds offer professional investment management backed by research and experience.
  2. Diversification. Funds are invested effectively among all sorts of investments. That greatly reduces investment risk.
  3. Cost efficiency. Funds offer returns at an affordable cost to investors.
  4. Customization. Funds fit most investment goals. Though diversified, some funds load up on stocks, whereas others load up on bonds.

What are its downsides?

Mutual funds have some potential drawbacks.

  1. Expense. Not every fund is a bargain. Some funds charge more than they should.
  2. Participation. Investors leave their financial future to someone else.
  3. Performance. Many funds under-perform market-wide benchmarks such as Dow Jones industrial average, and S&P 500 index funds.

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