Investment Companies - Benefits of Mutual Fund Ownership

Investment companies offer three main advantages to investors:

  • liquidity
  • diversification
  • professional management

Liquidity
Mutual funds can be sold on any given business day. Investors can convert their shares into cash within a short period of time, in a week or less, and at a reasonable price. They can sell shares in person, online or by phone within seconds. This ease of conversion from a non-cash asset into cash makes mutual funds a highly liquid investment. Liquidity refers to the quality of an investment's asset-to-cash transfer.


Diversification
Reduces the risk associated with owning too much of the same thing, or "putting all your eggs in one basket". A mutual fund is a convenient way for investors to spread out their risk among different investments. The mutual fund pools money from many sources to purchase interests in hundreds of companies, and thus allows investors who would otherwise be unable to adequately diversify their holdings to do so with a limited amount of assets.

Professional Management
This is one of the major advantages of mutual funds, especially for inexperienced or time-strapped investors who nevertheless need a way to fund their retirement or save for college tuition and expenses. Moreover, for very little money, the average investor is able to secure the professional money management services of an experienced financial consultant.

Other Services
In addition to these three benefits, mutual fund companies also offer several types of services that make investment management a lot easier for the client:

  • For one, investors receive regular statements, summaries and reports showing cost basis, gains or losses, contribution amounts and year-end tax information.
  • Investors can also arrange to have regular contributions systematically invested, dividends and capital gains reinvested, or funds automatically withdrawn.
  • Investors also retain their voting rights, which are like those enjoyed by common stockholders: they can vote for changes to the board of directors, approve or reject an investment advisor, decide for or against changes to a fund's investment objectives, or vote on sales charge modifications.
Types of Funds
Related Articles
  1. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  2. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  3. Professionals

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
  4. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  5. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  6. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  7. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  8. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  9. Investing Basics

    Online Portfolio Management, DIY or Fee-Based Financial Advisor: Which Is Right For You?

    Should you use an online financial planning service, or do professional, fee-based financial planners justify their higher costs?
  10. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  3. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  4. Series 79

    A examination to ensure a candidate is qualified to become a ...
  5. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  6. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
RELATED FAQS
  1. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
  2. What are some of the major regulatory agencies responsible for overseeing financial ...

    There are a number of agencies assigned to regulate and oversee financial institutions and financial markets, including the ... Read Full Answer >>
  3. Why is the Nasdaq more heavily weighted to tech stocks than other stock exchanges?

    The Nasdaq became the world's first electronic stock exchange at its inception in 1971. The exchange's dedication to advancing ... Read Full Answer >>
  4. How are margin calls regulated by the SEC?

    The Federal Reserve Board and the Financial Industry Regulatory Authority (FINRA), not the Securities and Exchange Commission ... Read Full Answer >>
  5. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  6. How does an underwriter syndicate work together on an initial public offering (IPO)?

    An underwriting syndicate is a group of investment banks that share the responsibility of marketing the shares of a company ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!