What Makes Mutual Funds Good Investment Options. Mutual funds are one of the most highly utilized investment options among average investors and financial professionals alike. But why is investing in a mutual fund a good idea? While some mutual funds are objectively better investment than others (and even others that serve very specific investment needs), what mutual funds grant investors access to is perhaps the most important benefit.
Mutual Funds and Poor Trade Execution. If you buy or sell a mutual fund, the transaction will take place at the close of the market regardless of the time you entered the order to buy or sell the mutual fund. I find the trading of mutual funds to be a simple, stress-free feature of the investment structure. However, many advocates and purveyors of ETFs will point out that you can trade throughout the day with ETFs. If you decide to invest in ETFs over mutual funds because your order can be filled at 3:50 pm EST with ETFs rather than receive prices as of 4:00 pm EST with mutual funds.
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If you’re a bit more experienced in investing or are fortunate enough to have a bit of money to ”play around with” for a while, a somewhat more aggressive approach might be right down your alley. Determining Asset Allocation. Once level of risk tolerance is determined, consider your desired asset allocation—the mix of investment assets (stocks, bonds, and cash) comprising your portfolio. The proper asset allocation will reflect your level of risk tolerance: aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).
Mutual Funds are Professionally Managed. Many investors don’t have the resources or the time to buy individual stocks. This is where professional management is valuable. Investing in individual securities, such as stocks, not only takes resources but a considerable amount of time. By contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund.
Mutual Funds Are Diversified Investments. The nature of mutual funds as pooled investments that are professionally managed means that investors generally can easily accomplish one of the most important standards of smart investing — diversification. To diversify means to spread market risk by holding a variety of several different securities, rather than just a few. Most mutual funds invest in dozens or hundreds of stocks or bonds within one portfolio. Depending upon the type of fund, this accomplishes the fundamentals of diversification with as little as one or two mutual funds. However, when building a portfolio of mutual funds, especially as investment assets and objectives grow more complex over time, investors are smart to diversify across several funds in different categories.