Mutual fund ownership by U.S. households has grown appreciably over the past three decades. Forty-four percent of all U.S. households owned mutual funds in 2011. In 1980, this same figure was less than 6 percent. Furthermore, approximately 89 percent of total mutual fund assets were owned by these same estimated 90 million individual investors. So just what is it about mutual funds that make them such an attractive investment option?
Diversification. Mutual funds invest in a broad spectrum of securities and debt instruments. Thus, an investor can potentially limit their investment risk by reducing the effect of a decline in any single security. For example, if you own 100 shares of XYZ stock and it all tanks, you lose your shirt. However, if you own 100 shares of ABC mutual fund which is comprised of 5% XYZ stock, when the stock declines, your portfolio won’t feel the full brunt of it. Another benefit of diversification is that one can gain ownership to more companies and industries with a lower overall purchase price when compared to purchasing outright individual shares.
Professional Management. Most investors don’t have the time or wherewithal to perform the necessary research and continual analysis required to protect their investment. By pooling the money of many investors, mutual funds are a way to receive full-time professional management that few investors would be able to otherwise afford. These “fund managers” have teams of analyst and researchers who routinely update them and provide recommendations as to how the fund can achieve its goals. Thus, by investing in mutual funds you can rest assured that someone is continually monitoring you investments performance and making the necessary adjustments when warranted.
Liquidity. Buying and selling shares in a mutual fund is just as easy as it is to purchase shares of an individual stock. Most people can either invest or divest of their holdings within the same business day. This makes this vehicle extremely attractive for those who may need “relatively” quick access to their funds.
Convenience and Simplicity. Instead of having to track down and purchase each individual share, you only have to keep track of one; that of the mutual fund itself. Additionally, you will still receive the benefits of owning a diversified portfolio and a wide range of services including:
- The ability to purchase or sale your shares via mail, telephone or internet
- Minimal investment floors; allowing you to invest with as little as $50-$100 per month
- The ability to schedule automatic investments/transfers into or out of the fund via your bank account