- Mutual funds permit individuals to access investments they may not otherwise be able to afford on their own. For example, a person may want to own shares of a high-priced blue chip stock that trades for $125 per share. With $5,000 to invest, that would yield just 40 shares and the risk of all the investor's eggs in one proverbial basket. Mutual funds with millions of dollars in assets can buy thousands of shares of many different kinds of companies. They also provide professional traders and research staffs, both of which are key resources aimed at maximizing returns.
- Mutual funds generally come in three different types. Those focused on equities spend most or all of their assets on shares of public and private companies. While riskier than other fund types, these also come with the possibility of large annual returns, given the right mix of investment choices. Debt funds concentrate on corporate bonds, Treasury bills and bonds, and municipal bonds that pay fixed interest rates. The higher-rated bonds carry relatively little risk yet still offer more than banks. Balanced funds offer a combination of equities and bonds that can provide growth potential along with fixed yields. Conservative investors, for example, might choose a fund with 30 percent equities and 70 percent bonds.
- Mutual fund investors have a wide range of investment types from which to choose. People should first take the time to analyze their personal financial situation, age and risk tolerance before writing out their checks in the hopes of higher returns than they could otherwise obtain. Many mutual fund companies offer individual account executives who can review clients' needs in detail, often with one-on-one consultations that can help to clarify the appropriate investment choices.
- Diversification can avoid a broad array of potential investment disasters. While few investments are completely guaranteed, mutual funds that spread money among different asset types generally offer more comfort than those investing in a single asset class. For example, while technology stocks performed extraordinarily well as a group with the advent of the Internet, the burst of the dot-com bubble bankrupted many individuals and funds that saw only stellar returns in perpetuity and refused to recognize the potential downside.
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