The main benefit of a mutual fund is that it allows you to spread your money around, which is generally a good thing to do. Diversification is a cardinal rule of successful investing and that is what mutual funds help investors achieve. One share of a mutual fund could potentially give you an ownership interest in the stocks and bonds of dozens of different corporations. A mutual fund of mixed stocks and bonds is good to have because a decline in any one company is offset by the stable value or rising values of other companies in the mutual fund portfolio.
A mutual fund is an investment pool. You and thousands of other investors put money into the pool, which the mutual fund managers uses to buy a wide variety of stocks and bonds and other financial assets. As an investor in a mutual fund, you own a share of all the stocks and bonds owned by the fund.
A mutual fund of mixed stocks and bonds can help you avoid making huge mistakes. Instead of owning a substantial amount of one stocks that could potentially go way down in value, a mutual fund with a good mix of stocks and bonds will have you so well diversified that one or two bad companies won't send you to the poor house.
You might need as much as $100,000 to build a truly diversified portfolio of individual stocks and bonds, whereas an investment of about $1,000 in a mutual fund of mixed stocks and bonds would have about the same level of diversification. One of the beauties of mutual funds is that small investors can diversify even more by buying multiple mutual funds that focus on companies in different sectors, such as energy, retail or foreign companies.
Mutual funds have professional money managers who make the daily decisions on what mix of stocks and bonds are bought and sold in the fund's portfolio. Fund managers are trained to make those complicated decisions in volatile markets. They are in constant touch with the companies and market sectors they invest in, providing an advantage for small investors who want to participate in the stock and bond market, but do not have the time or skills to do so. Also, the fund manager's success is tied to the performance of the mutual fund, because they're paid based on how well the fund does -- which is good for investors.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.