by Catherine Rein
(last updated June 4, 2009)
Mutual funds are a very common form of investment. They provide investors with an easy way to get started in investing. You can invest a small amount, typically less than $250 to start, and easily buy and sell shares of a mutual fund. Most mutual funds are not closed funds, meaning they create new shares as each new investor is added.
Mutual funds also provide diversification, since most funds buy a wide range of stocks and/or bonds in a number of industries. There are certain types of mutual funds that have very low fees associated with investing in them, particularly index mutual funds. These are funds that have their asset allocation tied to a certain index. Index funds typically have an expense ratio of less than 0.2% per year. This means that on a $100,000 investment you would pay $200 in annual expenses. Higher expenses are associated with actively managed funds. The average expense ratio for these funds is 1.5% per year.
You should consider the following advantages and disadvantages of mutual funds before investing:
Keep in mind that investing with mutual funds involves costs, even if the fund performs poorly. The fund manager receives compensation for their time and expertise whether or not the fund performs well. As an investor in a mutual fund you are also giving up some control over your investment. You cannot directly determine the fund's portfolio make up at any point in time. The fund manager makes the decisions when to buy and sell various holdings.
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