The mutual fund then passes along the profits (and losses) of those investments to its shareholders. So if a mutual fund does well, you benefit. But, they’re not risk-free. Read on to learn more about how mutual funds work.
Frugality: Mutual Funds Cost Less to Manage Than Other Portfolio Types, Costs as a percentage of assets in the portfolio are usually lower for an actively-managed mutual fund when compared to an actively-managed portfolio of individual securities. When you add up transaction costs, annual fees paid to a brokerage firm, and the cost for research tools or investment advice, mutual funds are less expensive than the typical portfolio of stocks. Other variables influence the cost of managing a portfolio, such as the amount of trading activity, the size of transaction, and taxes.
Variety: Mutual Funds Come In Many Different Categories and Types. As you grow your portfolio of mutual funds, you will want to diversify into various mutual fund categories and types. You can invest in mutual funds that cover the main asset classes (stocks, bonds, cash) and various sub-categories or you can even venture into specialized areas, such as sector funds or precious metals funds. Affordability: Mutual Funds Have Low Minimums, Most mutual funds have minimum initial investment requirements of $3,000 or less. In many cases, if the investor initiates a systematic investment program, where they have a fixed dollar amount or fixed number of shares purchased once per month, the initial investment can be as low as $1,000.
Bottom Line on Buying Mutual Funds
Each investor is charged a percentage of his or her investment to help cover all the costs of running the mutual fund, including having a professional fund manager as well as researching, buying, and selling stocks. But again, investors can benefit from their collective investments. Mutual fund fees are spread out over all of the investors, so the costs to each individual investor is still much less than it would have been if he or she had purchased the stocks directly and paid a broker or financial advisor to manage the investments. Though many mutual fund options are indeed cost-effective, there are many types of mutual fund fees, from front-load fees to constant-load fees, so it is always best to be aware of the type of fee and how it is calculated before investing in a mutual fund.