What Mutual Funds Can Do and Can’t Do

If you are new to investing, mutual funds can be a good place to start to get your feet wet for a number of reasons.

Expert management – An investment professional actively manages the portfolio, determining what, when and how to buy or sell securities. This is particularly helpful because the professional has access to more tools, resources and information faster than the average individual investor.

Risk reduction – A typical mutual fund would be invested across different markets, asset classes or market sectors. This allows the investor to benefit from diversification.

Ease of Liquidity – In general, except when in a locked-in period (one to six months from initial investment), you are able to sell your mutual funds within a short period of time if needed.

Reduced paperwork – Managing your invest personally, would typically require you to deal with some paperwork relating to dividends, other corporate actions and even taxes but investing in a mutual fund significantly reduces the need to do this.

Inspite of these nice things they do for your portfolio, the can’t do certain things:

Guarantee returns – Mutual funds don’t have a guaranteed rate of return neither do they guarantee that there would be positive returns.

Eliminate Risk – Not even money market funds are risk free. In spite of the best effort of the manager, there is still the possibility that you can get less than you put in or you lose all your money.

Produce Windfall Gains – The typical mutual fund would be invested across different sectors and securities, some will do very well, some will be okay and some will be bad. So they are most likely going to generate returns that are close (better/worse) to the average market return.

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