Mutual funds offer investors choice and diversity.

A primary advantage of mutual funds is that they offer investors benefits that would be difficult to achieve individually, such as accessibility, redeemability, professional management and diversification. With more than 10,000 mutual funds to choose from, however, the average investor could become overwhelmed with the choices.

What is a mutual fund?

A mutual fund is a company that invests in a wide range of securities and is managed by professional investment managers. Mutual fund shareholders, by owning shares of the mutual fund, are indirect owners of the securities held by the fund. The most common form of a mutual fund is an open-end fund, which means the fund can redeem or issue shares at any time. Shareholders may be rewarded for their investment through an increase in share prices and distributions (dividends and capital gains).

Generally, the managing company earns income through management fees, based on the total amount of assets in the fund. In some cases, it will also earn revenue through sales fees.

What are the advantages of mutual funds?
1) Professional Management. Professional investment managers are responsible for managing all of the money in a given fund. Their decisions, in large part, are based on extensive research about the market and economic conditions. Investing in a mutual fund takes some of the guesswork out of investing — investors can rely upon these professional investment managers to help them achieve their financial goals.
2) Flexibility. Mutual fund investors who invest in a “family” of mutual funds often have the flexibility to transfer all or some of their investments from one fund to another. This becomes an advantage when an investor wishes to exchange his or her funds based on what the market is doing. Please note that exchanges are considered to be sales and may have tax consequences. Be sure to consult your tax adviser for further information.
3) Choices. With more than 10,000 mutual funds currently available, investors are not faced with a lack of choices — in fact, there are mutual funds suitable for nearly every level of risk tolerance. Investors should seek to align their choice of mutual funds with their long-term financial goals.
4) Affordability. One of the most attractive aspects of mutual funds is that they are affordable — they offer even “small” investors the benefits of professional management and diversification that, at one time, only wealthy investors could enjoy. Some funds have no minimum dollar amount to invest — others have minimum initial investments, but may allow lower monthly contributions. With so many choices, investors should consult their financial advisor to determine which funds may best suit their goals and levels of risk tolerance.