Series 6

By Investopedia AAA

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to have regular contributions systematically invested, dividends and capital gains reinvested, or funds automatically withdrawn.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
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