Are Mutual Funds a Good Investment?

A mutual fund is a professionally managed pool of money that has been usually invested by individual investors. The funds invest mostly in stocks, but there are funds that also invest in bonds, government debt (i.e., T-Bills) and other income producing assets. In the equity markets, funds can be found that invest in the broad market while others cast a narrow net in only certain industries, or in companies of a particular size or age. Geographically, funds invest in US companies, or there are funds specializing in larger regions and even down to specific countries. The breadth of the range of mutual funds almost guarantees that someone looking to invest can find a fund tailored to their personal choices.

But the question is what makes a fund a good investment. As already said, funds are professionally managed by people who know the underlying fundamentals of the stocks they are trading in. Also, the enormous amounts of money funds control and the diversity of their portfolios can mitigate a lot of the swings in the market. Because of the importance of the funds investments, fund managers often have direct access to top-level executives at the companies they invest in so their information and knowledge is as current and complete as possible.

On the other side, funds can be expensive. The fund managers, staff, and other expenses are paid for out of the earnings and asset pool they control. As an individual investor in a mutual fund, you have no say about which companies the fund invests in. While having a professional looking out for your money sounds like a great idea, fund managers do sometimes make mistakes, and not only your profits (both realized and not) may disappear along with a portion of your original investment.

The best way to find what fund suits your investment strategy is to read the fund’s prospectus. This is a legally required document by the Securities and Exchange Commission that the fund must provide you on request. In this document, it lists the historical returns the funds has had and a review of its expenses and fees charged to the fund. Usually, a biography of the fund managers is included so you can get an idea of their background and personality.

By reading the prospectus of several funds, you will get an idea of the strategies each fund uses to maximize your returns and find a fund that closely matches your own goals and investment objectives.