What Are the Advantages of Mutual Funds? (2024)

For investors with limited time to spend watching the ups and downs of the markets, mutual funds offer a good alternative. Here are a few reasons to give up individual stock picking and turn to mutual funds.


One golden rule of investing for both large and small investors is to go for asset diversification. That involves reducing the risk to your assets by buying a mix of stocks from different industries and investments of different types. For example,buying both retail and industrial stocks reduces the impact on your portfolio of a poor quarter in one of those sectors. And putting some of your money in bonds protects you from a precipitous drop in stocks.

Key Takeaways

  • Mutual funds offer diversification or access to a wider variety of investments than an individual investor could afford to buy.
  • There are economies of scale in investing with a group.
  • Monthly contributions help the investor's assets grow.
  • Funds are more liquid because they tend to be less volatile.
  • The investor gets professional investment management services.

To achieve a truly diversified portfolio, you would have to buy several stocks of companies in various industries plus bonds with different dates of maturity from several issuers. Such a wide selection is beyond the reach of most individual investors. By purchasing mutual funds, you get instant diversification.

One caveat, however, is that you might not get adequate diversification by investing in a single mutual fund. Don't put all your money in a single sector-specific or industry-specific fund. An oil and energy mutual fund might spread your money over 50 companies, but if energy prices fall, your savings will suffer. Instead, look for a fund that will spread your assets among several leading industries. You'll take advantage of pop in any one of them while avoiding a big hit if one sector has a rough year.

Economies of Scale

The easiest way to understand economies of scale is to consider the volume discount. In many stores, the more of a product you buy, the less it costs. A dozen donuts can be cheaper per donut than buying three. This also occurs in the purchase and sale of securities. If you buy one share of stock, the transaction fee will be the same as if you bought 1,000 shares. That's a hefty bite out of your investment in one share, but a negligible nibble out of 1,000 shares.

Fees vary widely. Read the fine print to understand what fees you will pay for investing in the fund.

Mutual funds take advantage of their buying and selling volume to reducetransaction costs for their investors. When you buy a mutual fund, you diversify without paying the 10 to 20 transaction fees that would give you a similarly diverse individual portfolio. And that's just the initial purchase fees. Take into account the transaction fees for every modification to your portfolio and the costs add up.


The owner of a mutual fund can invest a regular round sum every month, say $100 or $200. That gives the investor another tiny bite of many assets. A stock-picker, by contrast, might get one or two shares of stock, with an odd number of dollars left over. Or the investor can save up for many months to get one share of Amazon.

These periodic investments in a mutual fund also allow the investor to take advantage of the benefits of dollar-cost averaging, a strategy that cushions a portfolio from the impact of price volatility.

So, rather than waiting until you have enough money to buy higher-cost investments, you can get in right away with a mutual fund. This choice provides an additional advantage: liquidity.


An investor who is hit with a financial emergency might have to sell out in a hurry. That can be disastrous if the assets have taken a hit at the wrong moment. It tends to be less so in mutual funds, which swing in value less wildly because of their diversification.

Watch out for any fees associated with selling, including back-end load fees, which are percentages deducted from your total when you sell the fund. Also, note that mutual funds, unlike stocks and exchange-traded funds, transact only once per day after the fund's net asset value is calculated.

Professional Management

When you buy a mutual fund, you also are choosing a professional money manager. This manager makes the decisions on how to invest your money, based on a good deal of research and an overall strategy for making money. Only you can decide whether you are more comfortable with that than with making the decisions on your own.

The Bottom Line

If you decide to forego stock-picking and go with a mutual fund, you still have one last investment decision to make, and that is which fund to buy. There are thousands of them out there.

Read the prospectuses until you find one that matches your attitude toward risk-taking or risk-avoidance. Read the fine print to understand what fees you will pay for investing in the fund, as they vary widely.

Finally, understand going in that even mutual funds experience market fluctuations and may even provide returns that are below the overall market.

What Are the Advantages of Mutual Funds? (2024)


What are the benefits of mutual funds? ›

Investing in mutual funds offers several benefits such as professional management, diversification, liquidity, low cost, tax benefits, affordability, safety, and transparency. Can you lose money in mutual funds? Yes, mutual funds are subject to market risks and hence there could be a possible loss of principal.

What are advantages and disadvantages of mutual funds? ›

Mutual funds have pros and cons like any other investment. One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins.

What is the primary advantage of mutual funds? ›

Answer and Explanation: The correct answer is option B. mutual funds allow people with little money to diversify. Diversification is enhanced through the exposure of a multitude of stocks.

What is the advantage of investing in a fund of mutual funds? ›

Low Cost — An important advantage of mutual funds is their low cost. Due to huge economies of scale, mutual funds schemes have a low expense ratio. Expense ratio represents the annual fund operating expenses of a scheme, expressed as a percentage of the fund's daily net assets.

Are mutual funds a good option? ›

Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers.

Are mutual funds a good idea? ›

All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.

What are the three main advantages of mutual funds? ›

Why invest in mutual funds?
  • Diversification. Mutual funds give you an efficient way to diversify your portfolio, without having to select individual stocks or bonds. ...
  • Low cost. ...
  • Convenience. ...
  • Professional management.

What is downside in mutual fund? ›

Downside risk is a general term for the risk of a loss in an investment, as opposed to the symmetrical likelihood of a loss or gain. Some investments have an infinite amount of downside risk, while others have limited downside risk.

Why people don t invest in mutual fund? ›

As the funds are invested in market instruments, they carry certain stock market risks like volatility, fall in share prices etc., which deters us from investing in mutual funds. As we don't want to lose money, we often let it stagnate in our savings accounts.

Which mutual fund is best? ›

  • LIC MF Flexi Cap Fund Direct Plan Growth Option. ...
  • Mirae Asset Flexi Cap Fund Direct Growth. ...
  • Axis Flexi Cap Fund Direct Growth. ...
  • Canara Robeco Flexi Cap Fund Direct Plan Growth Option. ...
  • Sundaram Flexi Cap Fund Direct Growth. ...
  • Navi Flexi Cap Fund Direct Growth. ...
  • SBI Flexicap Fund Direct Growth.

How do I choose a mutual fund? ›

Understanding various investment costs in mutual funds:
  1. Understand the Expense Ratio. The expense ratio is the fee paid by the investor to the fund house.
  2. Learn about one-time charges. ...
  3. Know about entry load. ...
  4. Be aware of exit load. ...
  5. Understand load. ...
  6. Account fee. ...
  7. Management fee. ...
  8. Recurring fee.

Which type of mutual fund is best for long term? ›

For long term investments, consider equity funds as they offer the potential for the best returns. Choosing a growth mutual fund option can help you achieve your long-term goals as your returns will grow through compounding over time.

What are two main reasons you would invest in a mutual fund? ›

There are several specific reasons investors turn to mutual funds instead of managing their own portfolio directly. The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs.

Which is better mutual fund or stock? ›

Mutual funds or stocks—which one offers more security? Mutual funds typically offer more security compared to individual stocks because they spread investments across various assets, reducing the impact of market fluctuations. However, the level of security depends on the specific mutual fund or stock chosen.

Is mutual fund good for long term? ›

Long-term mutual funds offer several advantages for investors seeking to build wealth over time. These benefits include: Compounding: Long-term mutual funds harness the power of compounding, where returns are reinvested, leading to exponential growth of the investment over time.

What is the main purpose of a mutual fund? ›

Mutual funds let you pool your money with other investors to "mutually" buy stocks, bonds, and other investments. They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them.

How do you make money from a mutual fund? ›

If you own a mutual fund, you're considered a shareholder. You can make a profit from your investments in one of two ways: through dividends or capital gains. Dividends are a reward to shareholders for holding onto certain stocks or mutual funds for the long term.

What are the risks of mutual funds? ›

All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.

Why mutual funds are better than stocks? ›

Mutual funds or stocks—which one offers more security? Mutual funds typically offer more security compared to individual stocks because they spread investments across various assets, reducing the impact of market fluctuations. However, the level of security depends on the specific mutual fund or stock chosen.

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