Why Mutual Funds?

1) Mutual funds are an ideal way to diversify your holdings. Instead of investing in individual stocks, you can spread your money over various instruments by investing in one mutual fund. Usually, a mutual fund consists of 10 or more different instruments and is categorized by its growth rate.

2) All funds have costs associated with them. They are usually low and typically range from 1% to 5% of your investment. These fees are deducted from your fund on a daily basis.

3) By investing in a mutual fund, you are leaving your money in the hands of a financial professional. Each fund has a manager who manages the money for that particular fund.

4) Minimum investments are low. Some companies will allow you to begin investing with as little as $25 a month in an automatic monthly investment plan. This requires setting up a direct deposit system from your personal account (checking or saving), which will work in your favor since you're automatically saving through no effort on your own.

5) Mutual funds are highly liquid. You can easily convert a mutual fund into cash -- an option not available to you with IRAs or a 401(k), for example.

6) As a mutual fund investor, you have the option of choosing a type of fund that invests in a way you are comfortable with. There are a variety of fund types for you to choose from, ranging from general equity (stock) funds, bond funds, international funds, index funds, and balanced funds, all the way to sector funds. Each of these fund types has a specific focus, depending on your interest and outlook. Investing with an eye toward a social conscience, for example, has become more commonplace in recent years. Opening an account with a company that goes against your morals or philosophy can leave a bad taste in your mouth, to say the least.

7) Mutual funds expose you to various asset classes. You can find funds that consist of stocks, bonds, and cash. By investing in a fund with a good mix of asset classes, you will reduce your risks.

1) Loss of control -- One of the drawbacks to investing with mutual funds is the fact that you can't choose the types of stocks that a fund invests in; that's up to the fund manager. It is also important to remember the fund manager really doesn't have much of a better chance of picking successful stocks than you do.

2) Lack of disclosure -- Mutual fund companies are not required to disclose all of their information to their shareholders. The published information is only a fragment of a larger picture. For example, you'll know what the top 10 holdings of the fund are, but the lists of all holdings are only published twice a year to shareholders. In between the two, any number of changes can take place.

3) Taxes -- Mutual funds distribute their profits among shareholders each year. You are required to pay taxes on these distributions, even if you don't redeem your funds. Here again, the control is out of your hands since you have no idea when or which securities are sold during the time you hold the fund.