With so many different types of investments out there it is hard to know what it right for your particular investment portfolio. Mutual funds are one of those investments that you have probably heard about but maybe do not know if they are still viable investments. Since it is true that all investors are different, mutual funds may not be best for every portfolio but there are definitely a lot of benefits that they have to offer.
Diversification
Perhaps the most important rule when it comes to investing is diversifying your assets. This is obviously very important for mitigating risk. Choosing individual stocks from different industries that offset each other is one way of doing this. However, mutual funds allow for a much more simple way of diversifying and furthering your reach over more of the market. Creating individual portfolios that mitigate risk is not only costly in terms of fees but it is also extremely time consuming.
Economies of Scale
When you go to a store that sells in bulk you already know about the value the economies of scale will add. This same idea transfers to the market and economy. Buying individuals stocks or securities is always going to be more costly than buying bulk such as mutual fund.
Because mutual funds are so large they are able to take advantage of economies of scale and significantly cut down on transaction costs for investors. This allows you to not only save money but use the money that would have been eaten up by fees to invest and in turn make more money.
Divisibility
If you are the average investor you probably don’t oftentimes have the exact sum of money needed in order to buy a round lot of stock. Mutual funds however allow you to buy in much small sums of money, usually starting at as small as $100. This also allows for investors to set up automated investments so that they can make frequent and periodic investments. This is extremely beneficial as it allows for investors to take advantage of dollar-cost averaging. This also eliminates the down time that investors usually would have while they are building the necessary amount of cash in order to invest.
Liquidity
Another unique advantage of mutual funds is that you can buy and sell as your please and you are generally not locked into the investment. This is not a recommended practice though because there tend to be a lot of fees associated with the buying and selling of investments. Mutual funds are most suited for buying and holding anyways.
As is the case with any investment, there are a number of risks that you have to consider. They are not immune to the fluctuations that are found in the market nor do they lack the other downsides of common investments. It is always important to remember that what is ideal for one investor is not necessarily ideal for your particular portfolio.