Why Buy Mutual Funds?

Mutual funds are a great investment, whether you want to grow your retirement nest egg or generate short-term income.  There are thousands of mutual fund possibilities, from the short term bond funds meant to sustain your investments until retirement, or the long term perspective growth mutual funds that focus more on growth of capital than preservation. In any case, buying mutual funds is one of the biggest steps an investor can take for their portfolio and for their future security.

The Main Goal of Funds

The main goal of a mutual fund is to spread risk around to many different investors and create a well diversified portfolio with as little as a few hundred dollars.  To buy a share of stock in every company that a mutual fund holds might cost tens of thousands, while the minimum investment in the fund is likely $500-$1000. This allows starting and budget investors to experience the market with a well balanced portfolio, even with a shoestring budget. Buying stocks individually will require far greater amounts of money and commissions, and therefore, small investors are actually saving money and limiting risk with the purchase of a mutual fund rather than individual investments in stocks.

Mutual Fund Fees

There are some fees associated with mutual funds.  First is a load fee, which is generally avoidable. Buying into a mutual fund with load fees makes very little sense, especially since most load fees are as high as 5% on your initial investment. Most load funds can be swapped with no load mutual funds to limit the damage of fees on your account balance while producing the same returns.

The other kind of fee is an annual fee which simply cannot be avoided. Generally anywhere from .4%-3% per year, this fee helps cover administrative costs, which translates into those high priced mutual fund advertisements in financial magazines, as well as the transaction costs of buying and selling large bulks of stock. Thin trading mutual funds have lower fees, generally less than 1% per year on your investment capital. 

Index mutual funds are the best bet for low fees as they only make adjustments as often as the indices they are built to track. The difference of mutual fund fees can often work out to amounts in the five figures on the overall investment return at retirement. A few percentage points year over year certainly hurts returns, and thus, you should try to pick good mutual funds with low fees; Vanguard mutual funds are a great place to start.

Mutual Funds Leave Decision Making to Professionals

Time is something that cannot be created; most passive investors have little time to adjust portfolios and monitor the ups and downs while still working eight hours a day and managing household duties. When buying into a mutual fund, you're investing with professionals who manage the world markets, 24 hours a day around the clock. The small percentage fee is nothing compared to the time it would take to do proper research and pick good stocks. Mutual funds give the idea that your money is safe and invested with a professional who has made the stocks markets a career.