The greatest advantage to mutual fund investing is diversity. When all of your eggs are in one basket, if you drop that basket, you are screwed. A mutual fund is made up of many companies, with different philosophies and different decision makers. Statistically speaking, a mutual fund is a safer investment because the downfall of one company does not necessarily translate to the downfall of another. People invest in mutual funds when they want the smallest opportunity for disaster, with the greatest opportunity for success.
Mutual funds can contain several different companies in one industry, or many industries. They can be made up of emerging companies or companies that anchor our society. A “Blue Chip” fund will be made up of companies that have been around several years, and have traditionally performed well. Think “McDonald’s,” “Xerox,” “General Motors,” “Sony.” Even though these types of companies rise and fall with the rest of the world, they have traditionally grown in value. Mutual funds made up of companies like this will generally perform well over a ten or twenty year period.
A mutual fund may be industry specific. For example, an auto manufacturing fund. This, as the name implies, will be made up of car makers. The advantage here of course is when a particular industry does well.
Mutual funds do not always make a profit however. The companies in a mutual fund are chosen by a regular person like you or I. They can make a mistake, and choose a company that really sucks. A bad investment or portfolio manager may choose several companies that perform poorly. The upside is this usually doesn’t lead to financial ruin, but it can cause people to sell their share in a particular mutual fund, leaving the value to drop a bit.
Over the long haul however, a mutual fund will generally do adequatesomething to consider when looking for a retirement plan, or a college fund to be used in fifteen years or so. When considering any type of investment however, remember one very important factwhen it comes to investing, nothing is written in stone; investments go up, and they come down.