Purchase of mutual funds involves owning pooled options in stocks, bonds, securities, or real estate for the sole purpose of generating profits through diversification of your investment. The investment is diversified by investing in both sector and industrial segments, thereby spreading the risks involved. When one portfolio fails to deliver and makes a loss, the impact is overshadowed by the one that actually makes a profit and shares dividends, spreading your risks.
Most investors would only afford a $100 to $200 dollars at a time to invest in mutual funds. Waiting until you have enough money to invest in a round lot of a stock or bond could be close to impossible since, you would be tempted to divert your resources. Investing in these smaller denominations could be the key to a hassle free retirement. A $100 invested in mutual funds and yielding a 10% interest per year would yield close to a million dollars in 20 years when compounded.
Mutual funds have the advantage of economies of scale, meaning that, the fund managers are able to get volume discounts from the purchase and sale of bonds, shares and stocks. Just like in a normal store, the more products one buys, the cheaper they become. The transaction fees are relatively low compared to when one security is bought at a time. This in the end, translates into better earnings for the individual investor.
Mutual funds are liquid investments, this means that, you can invest and withdraw your money at any time without any hassles. This makes it easy for low income earners to invest in a portfolio which would be impossible if, its not split into smaller denominations. This type of periodic low denomination investment that is done for a longer period of time reduces the amount of risk to the investor and cuts the cost of investment.
The funds are run by professional managers, who will carefully select the best performing options in the market. As an investor, you do not need to do the research yourself, which eventually saves you a lot of time, which could be spent doing something else of value to you. By using the dollar cost averaging technique, the managers are able to reduce the risk associated with this kind of investment.