Mutual Funds Are Common Investment Opportunities. What Exactly Are They?

• Author: Jessica Williams
• Posted: 2024-05-27

Investing is the best way to save for retirement and increase the value of your savings over time. In fact, for a lot of people, it might be the only realistic way to do so.

Over the years, countless people have opted for investing their money in mutual funds instead of the more traditional route of purchasing individual stocks.

What are mutual funds and are they a good investment option?

What Are Mutual Funds?

Mutual funds are investment pools where a collective of people decide to combine their financial resources to purchase securities as a group. These securities can be assets of various kinds, such as bonds or stocks, and they are always overseen by a fund manager (investment advisor).

The idea behind mutual funds is to mitigate risk by tying the assets of many different people into an aggregated pool consisting of a diverse array of securities. This way, any drastic changes in the value of certain securities will not severely impact the finances of any individual person.

What Kinds of Mutual Funds Exist?

Mutual funds exist in many different forms. Some of the most common are:

• Index Funds


• Equity Funds


• Specialty Funds


• Money Market Funds


• Balanced Funds

Each type of mutual fund has a different strategy, although the ultimate goal of each is to get the best possible financial outcome for fund members. Some take a more risky approach and some have investments in a wide range of different asset classes, while others have a focus on only making investments in enterprises that are perceived to be ethical.

What Are Some Benefits of Mutual Funds?

Mutual funds come with many advantages that make them safe and easy to handle investments, especially for those who aren't super investment-savvy.

Mutual funds are all professionally managed, meaning that having access to a mutual fund is essentially like having a dedicated money manager for your personal investments.

These kinds of funds are naturally diverse as well. There's little need to worry about having the correct level of security diversification when investing in a mutual fund, since it comes as a built-in feature. Overall fees are also generally reduced since you won't have to pay a broker everytime you sell an individual type of stock.

Additionally, despite what a resource-pooling investment might suggest, mutual funds are actually very liquid. They're generally considered to be solid investments, so they sell off quickly.

What Are The Downsides to Mutual Funds?

Mutual funds have many upsides, but ultimately they're not foolproof.

The biggest issue you can run into is bad management. Most fund managers are going to be experts in their field, so it's highly likely you'll get a decent return. However, the securities game can be tricky and even seasoned veterans can make bad calls every once in a while.

This is especially a problem if the collection of securities in a mutual fund is overly complex. It's entirely possible for there to be two sets of securities that function opposite from each other in the economy. For instance, it's possible for a mutual fund to have stocks in companies that do well during economic downturns and also have stocks in companies that do much better when the economy is healthy.

The end result of this is that financial gains from mutual funds can be lessened overall, or even negated in some cases.

One other major problem with mutual funds is the amount of money that ends up not being invested at all. Since individuals pool their resources with other people and other fund members inevitably cash out their investments at one time or another, that means mutual fund managers have to keep on to considerable reserves of cash to accommodate leaving members.

Since this cash is purely a liquid asset, it's not being invested in any way shape or form. As a result, whenever you invest in a mutual fund, a fraction of what you pay into it isn't actually going to be invested, giving you reduced returns when compared to just purchasing stock as an individual.

Are Mutual Funds A Good Fit for You?

Deciding whether you should invest in a mutual fund can be a tricky decision.

Mutual funds are generally safer investments since they come with built-in management and diversification. However, these benefits come at a cost and it's quite possible that you would be better off investing on your own.