- Professional money management
- Small investment amounts
- Fluctuating share values
- Some money kept in cash for fund liquidity needs
- Potential tax inefficiency
- Mutual fund fees and expenses
Investing Through Mutual Funds and ETFs
You can invest in all three major asset classes through mutual funds, which pool your money with that of other investors. Each fund's manager selects specific securities to buy based on a stated investment strategy.
Mutual funds offer two key benefits. Because most mutual funds own dozens or hundreds of securities, you achieve greater diversification than buying a few individual securities on your own. Also, the fund manager's expertise is part of what you pay for in buying mutual fund shares.
A mutual fund may invest in one of the three major asset classes, or combine them. For example, a balanced fund typically includes stocks and bonds. With an actively managed mutual fund, the fund manager buys and sells specific securities, trying to beat a benchmark index such as the S&P 500. A passively managed or index fund tries to match the return of a specific index by holding only the securities included in that index.
Before investing in a mutual fund or ETF, carefully consider its investment objectives, risks, fees and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.
Like index funds, exchange traded funds (ETFs) typically invest in a group of securities represented in a specific index, and the way they're organized means that expenses typically are lower than those of actively managed mutual funds. But you must pay a brokerage commission whenever you buy or sell ETFs, so your overall costs could be higher, especially if you trade frequently.
Mutual funds and ETFs are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.