Today, more than 93 million people invest in mutual funds, with an astounding total of more than 6.9 trillion dollars invested as of year-end 2001, according to the Investment Company Institute.1 There are four main reasons why mutual funds are so popular today.
It's a simple and economical way to create a diverse portfolio of stocks or bonds.
It's simple, because by choosing just one mutual fund, you'll typically be investing in a variety of securities. Because of this variety, mutual funds may help you to reduce risk. If you were to purchase just one stock -- or put all your eggs in one basket, so to speak -- you could risk losing the money you invested should the value of that one stock decline. With a mutual fund's investment in multiple securities, a gain in value of one stock could offset a loss in value of another. It's this inherent balance that helps to reduce your risk. Finally, mutual fund investing is economical compared to purchasing individual securities on your own. In fact, most investors would be hard pressed to find the time, not to mention the money, required to create their own diversified portfolio of individual investments.
Mutual funds are managed by professionals.
You don't have to choose each individual stock or bond held by the fund. You don't have to monitor these stocks and bonds daily. You don't need to decide when to purchase or sell the individual stocks or bonds. A trained professional does all of this for you when you invest in a mutual fund. Not only will you receive the professional skills of a portfolio manager, but you'll also typically find a team of skilled analysts and researchers who support the manager behind the scenes.
Mutual fund shares are easy to buy and sell.
Unlike other investments, like real estate, you don't have to wait for a buyer to make you an offer. You can request to sell your mutual fund shares at any time, which is why mutual funds are called "liquid" investments.
The mutual fund industry is closely regulated by the SEC (Securities and Exchange Commission).
The primary mission of the SEC is to protect investors and maintain the integrity of the securities markets. That's why more than 93 million people feel comfortable investing their money in mutual funds. The SEC imposes strict regulations on the mutual fund industry, including full disclosure in a fund's prospectus, mandatory annual and semiannual reports, registration with the SEC, the promise to meet certain operating standards, and compliance with stringent antifraud rules. More information about the SEC and its regulations are available at www.sec.gov.
Cheryl Marconi is a Massachusetts-based financial writer and editorial consultant. She has worked in the publishing and financial services industries for the past twelve years.
Would you like to know more about mutual funds? If your 401(k) plan account is serviced by Fidelity, you can access "The Mutual Fund - It's No Mystery," a six-part series covering the basics. Find it by logging into Fidelity NetBenefitsSM and clicking on the Planning tab.
