Mutual funds are one of the most commonly held investments for the passive investor. They are great for the individual investor who wants the risk and return profile, which only professional investors can create. In addition to the myriad fees involved in purchasing and/or redeeming mutual funds like front-end load, redemption fees, management fees and account fees, you may even have fees for exchanging or transferring your fund between common fund families. And yet, with all these fees, people continue to invest in mutual funds. There must be a good reason.
Experience and training count for a lot in the world of investments. It is a world where not knowing the right pricing convention can cost you a couple thousand dollars in a few seconds. The key to mutual fund performance and one of its main functions for passive investors is the fact it is a hands-off investment. The fund is professionally managed by money managers and a dedicated research team.
One perk to professional management is diversification, which serves a risk mitigation function for mutual funds. The more diversified your portfolio, the more you can mitigate the risk of losing your original investment value. Another way to say this is, "Don't put all your eggs in one basket."
Affordability is a key consideration for most mutual fund investors. The majority of those who invest in mutual funds do not have huge estates to invest and only small amounts to contribute on a monthly basis. Being able to pay into an investment on a monthly basis provides the mutual fund greater access to a larger investment community.
In addition to affordability, mutual fund shares can be easily redeemed (provided redemption fees or back-end funds are not excessive). Increased liquidity contributes to lowering the overall level of risk of investing in anything that is not as liquid as cash.
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