The
Myriad Advantages of Mutual Funds
After the
Civil War, shareholders in British investment trusts saw an opportunity to
profit by pooling their money to finance American railroads, farm mortgages, and
other industries. Similar arrangements were used to finance the American
industrial revolution after World War I.
The practice eventually led to the first mutual fund, which was established in
Boston in 1924.1 Since that time, mutual funds
have boomed. Today, some 98 million individuals have $7 trillion invested in
U.S. mutual funds.2
Mutual funds have helped people accumulate money for retirement, send their kids
to college, and pursue a range of financial goals.3
Here are some of the reasons why mutual funds are so popular with today’s
investors.
Diversification
A mutual fund is an investment vehicle that pools money from shareholders and
invests in a portfolio of securities. Because some mutual funds may invest in
hundreds of securities, they can provide a level of diversification that would
typically be out of reach for an individual investor.
Dollar-Cost Averaging
Mutual funds provide an ideal opportunity for dollar-cost averaging.4
By investing a fixed amount in mutual funds at regular intervals, investors can
purchase more shares when prices are low and fewer shares when prices are high.
The result can be a lower average cost per share.
Liquidity
There is no substitute for time when it comes to investing. However, sometimes
today’s emergencies take precedence over long-term goals. When that happens,
money you have invested in a mutual fund outside an individual retirement
account or an employer-sponsored retirement plan typically can be withdrawn at
practically a moment’s notice without penalties.
Mutual funds continue to attract more investors, and the choices among funds
continue to become more difficult. Keep in mind, however, that these three key
benefits are common to most mutual funds.
1) The Mutual Fund Handbook, National Underwriter
Company, 1996
2) Investment Company Institute, 2002
3) There are fees and expenses associated with investing in mutual funds,
including portfolio management fees and expenses and sales charges. Mutual funds
are sold by prospectus only. Be sure to read the prospectus carefully before
deciding whether to invest. The return and principal value of stocks and bonds
fluctuate with changes in market conditions. Mutual fund shares, when redeemed,
may be worth more or less than their original cost.
4) Dollar-cost averaging does not ensure a profit or prevent a loss. Such plans
involve continuous investments in securities regardless of the fluctuating
prices of such securities. You should consider your financial ability to
continue making purchases through periods of low price levels. However, this can
be an effective way for investors to accumulate shares to help meet long-term
goals.
©
2002 Emerald Publications
