Mutual Fund Benefits

Mutual funds offer the following advantages to investors:

  • Diversification - investing in mutual funds reduces risk in a portfolio, since the investor is able to own a proportional share of the many securities in each fund.

  • Professional management - each mutual fund has a full-time portfolio manager, who can devote more time than most investors in deciding what securities to buy and when to sell.

  • Liquidity - mutual fund shares can be sold at any time, and proceeds are usually received within a week or less.

  • Flow-through of dividends and capital gains and losses - a mutual fund that distributes at least 90% of net investment income is treated as a conduit - meaning that the mutual fund itself is not taxed, and the investors report the dividends and capital gains on their personal returns. If the fund distributes at least 97% of dividends and 98% of capital gains to investors, it is not subject to tax surcharges, so this higher amount is almost always distributed.


Exam Tips and Tricks
Most of the questions on the exam are concerned with open-end management companies or mutual funds.


Mutual Fund Types
Although many people think mutual funds are always composed of common stocks, the fact is that a mutual fund can be made up of any traded securities that suit the fund's objectives. Here are some examples of different types of mutual funds:

  • Stock funds - growth, value, large-cap stock, small-cap stock, international stock, sector funds

  • Bond funds - corporate, government, municipal, convertible

  • Money market funds - general, government, municipal

  • Balanced funds - a mix of stocks and bonds, sometimes known as asset allocation funds

  • Real estate funds - invest in a mix of real estate investment trusts (REITs), giving smaller investors a chance to gain exposure to the real estate sector in small amounts without high transaction costs.
Mutual Fund Classes, Sales Charges and Expenses

Related Articles
  1. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  2. Financial Advisor

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  3. Investing

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  4. Investing

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  5. Financial Advisor

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  6. Investing

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
  7. Investing

    The Advantages Of Mutual Funds

    Learn how to get diversification, liquidity and professional management at an affordable price.
Frequently Asked Questions
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should I do this?

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ...
  2. My wife and I both converted our Traditional IRAs to Roth IRAs over a decade ago and have invested the maximum allowed each year since. We're buying our first home soon. Do we both qualify for one-time, tax-free, $10,000 distributions?

    You and your spouse each qualify for a penalty-free distribution of up to $10,000 for the purchase, acquisition or construction ...
  3. Is a Thrift Savings Plan (TSP) a qualified retirement plan?

    Take advantage of the government's retirement plan for employees with the Thrift Savings Plan. As with a 401(k), contributions ...
  4. Who manages the assets in a Roth 401(k) account?

    Learn how to personally manage the assets in your Roth 401(k) plan and determine the best options available to help meet ...
Trading Center