Mutual funds have become popular because they offer 4 advantages:
- Diversification. A single mutual fund can hold securities from
hundreds or even thousands of issuers, far more than most investors could
afford on their own. This diversification sharply reduces the risk of a
serious loss due to problems in a particular company or industry.
- Professional management. Few investors have the time or
expertise to manage their personal investments every day, to efficiently
reinvest interest or dividend income, or to investigate the thousands of
securities available in the financial markets. They prefer to rely on a
mutual fund's investment adviser. With access to extensive research, market
information, and skilled securities traders, the adviser decides which
securities to buy and sell for the fund.
- Liquidity. Shares in a mutual fund can be bought and sold any
business day, so investors have easy access to their money. While many
individual securities can also be bought and sold readily, others aren't
widely traded. In those situations, it could take several days or even
longer to build or sell a position.
- Convenience. Mutual funds offer services that make investing
easier. Fund shares can be bought or sold by mail, telephone, or the
Internet, so you can easily move your money from one fund to another as
your financial needs change. You can even schedule automatic investments
into a fund from your bank account, or you can arrange automatic transfers
from a fund to your bank account to meet expenses. Most major fund
companies offer extensive recordkeeping services to help you track your
transactions, complete your tax returns, and follow your funds'
performance.
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