This can be one of the biggest advantages of investing in some mutual funds that are designed to diversify its investments. By buying fund shares and effectively pooling your money with other investors, you can spread your investment bets more widely than if you were purchasing individual securities on your own. You can also tap into foreign markets—including emerging markets—that are often difficult for individual investors to access. A mutual fund's diversification doesn't guarantee you won't lose money, but it can reduce the day-to-day volatility in your investment's value and it makes it less likely than investing in individual stocks that your entire investment would be wiped out.
By pooling your money with other investors in a mutual fund, you also get the services of a professional money manager—somebody you probably couldn't afford to hire on your own. Alternatively, if you are skeptical that a professional money manager will generate superior returns, you can purchase index funds. An index fund buys many or all of the securities that make up a market index, in an effort to replicate the index's performance.
Lower Trading Costs
While it can be costly to purchase a diversified basket of individual securities on your own, you can get the benefit of institutional buying power when you invest in mutual funds, thus lowering the cost of building your portfolio.
While funds offer professional money management and they can often trade securities more cheaply than you could on your own, you pay a price for these advantages, in the form of the fund's annual expenses. These expenses cover things like the portfolio manager's salary and the fund's administrative costs. In addition, your funds may charge some form of commission, often referred to as
As portfolio managers try to generate superior returns, they may sell securities and realize capital gains. If a fund has a net capital gain in a given year, this is distributed to shareholders in that tax year, who then have to pay taxes on the sum involved, unless they hold the fund in a retirement account, where the taxes will be deferred. If you are investing through a regular taxable account and you are looking to limit your annual taxes, you might talk to your Financial Advisor about funds that potentially generate more modest tax bills, such as tax-managed funds, index-mutual funds, exchange-traded index funds and municipal-bond funds.