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Mutual Funds Are Here to Stay

Excitement aside, mutual funds are more blessing than burden to investors. A mutual fund pools money from investors to purchase stocks, bonds, or other types of investments. Each share in a mutual fund represents a piece of ownership in every investment the fund holds as well as the income that those investments generate. By offering diversification with even the smallest share purchase, mutual funds help investors reduce their risk by allocating their investment dollars among multiple sectors and industries, companies of different sizes, and different types of investments. When fund management is truly professional, mutual funds offer the benefits of investing to people who don’t yet know how to pick good stocks and bonds, or to those who know how but don’t have the time.

Tip

As a mutual fund shareholder, you give up some control—it’s difficult to find out the investments that make up a fund’s portfolio at any given time. You can’t choose the securities that a fund manager buys or sells, or when those trades take place.

Mutual funds charge shareholders fees and expenses for performing their investment activities. That’s not necessarily a disadvantage—fund management does work for you and you pay them to do it. However, you’ll learn in this chapter that some funds are overly enthusiastic about assigning expenses to shareholders. Regardless how reasonable or outlandish, fees and expenses reduce the returns that shareholders receive. In addition, taxes ...