Mutual funds offer investors (particularly small investors) a variety of benefits as described below.

Diversification 

The beauty of mutual funds is that the holdings in a mutual fund are diversified. If you recall from Chapter 8, “diversification” is the act of investing in several different securities (for example, stocks) so that a decline in the value of one security does not necessarily affect the value of the other securities in your portfolio. Mutual funds hold so many securities that in many instances, even if the value of a particular stock goes down in value, it will not necessarily drag down the value of the other stocks in the fund. For this reason, many investors see mutual funds as less risky than investing in the stocks of one or two companies. Not all funds are low in risk, however even if the fund holds several different stocks. A fund that invests in only one sector of the economy, such as Internet-related stocks (which are known to be risky) would be riskier than a fund that invests in multiple industries such as trans-portation, banks, and restaurants.

Professional Management

Mutual funds offer Teenvestors an opportunity to invest in a product that is professionally managed. Not only are mutual fund managers ex-perienced in investing money but they also have the skills, time, and resources to re-search different investment opportunities. Thus, mutual funds relieve you of the bur-den of having to do your own research on different companies in order to decide which company’s stock will be a suitable investment. However, you still need to do your homework to determine whether the particular fund that you are interested in is a good investment.

Affordability

With many mutual funds, you can open up an account with a rela-tively small amount of money. This amount generally ranges from $1,00 to $3,000 for most funds. Some funds will allow you to invest small amounts such as $50 to $100 (to be automatically deducted from your bank account each month) until you meet their minimum required balance.

Liquidity

As an investment, open-end mutual funds are very liquid. They can always be sold back to the fund. Liquidity refers to how easy it is to sell your investments. If you owned a house, for example, and you wanted to sell it because you needed cash right away, you would have a hard time selling it in a short period of time (such as two weeks). In the investment world, experts would say that a house has low liquidity. Shares of mutual funds are very liquid because they can be sold quickly.