by Trent Lorcher

Created on: August 18, 2008   Last Updated: November 05, 2008

Mutual funds make up the bulk of millions of retirement accounts throughout the world. In addition to allowing average investors the benefits of professional money management, mutual funds provide the following advantages:

DIVERSIFICATION OF ASSETS

Stock market horror stories abound: retirement accounts wiped out, companies gone bankrupt, investors out millions. For example, investors lost millions of dollars earlier this decade when Enron went bankrupt. If those same investors would have spread their risk by buying stock several companies, in addition to Enron, those losses would have been reduced significantly.

Because each mutual fund owns stock in several companies, the risk is spread out automatically. If one company fails, the others pick up the slack.

VARIETY OF OBJECTIVES

Each fund contains different risks and rewards. With more than 20,000 funds worldwide, there's one to fit your investment objectives and your investing style. Those with high risk tolerance and many years until retirement can invest in aggressive funds. Those approaching retirement or those with low risk tolerance can invest in less risky funds. Those in retirement who need to draw income from their investments can invest in income funds.

A VICTORY OVER INFLATION

Fearful investors shun mutual funds in favor of guaranteed rates of return found at banks and credit unions. A look at the numbers, however, shows investing with the bank is a guaranteed loss. The average savings account hovers between 1-3 per cent. A certificate of deposit returns 4-6 per cent. With inflation averaging about 4%, that $10,000 you put in the bank 20 years ago has less value now than it did then, and that $10,000 CD has barely kept pace.

Stock Mutual Funds have easily outpaced inflation. Stock mutual funds can be divided into three categories: small cap, small companies; mid cap, medium sized companies; and large cap, large companies. Over a 30-year period small cap funds have averaged over 12% and large cap funds over 10.5%. The smaller the cap, however, the greater the risk.

LOW RISK FUNDS

Mutual funds are subject to market risks. If invested in the wrong fund, a drop in the market may prove costly for investors needing to cash out in the short term (see 1987, 2001, or 2008). Money market funds provide safety of principal for short-term cash needs while offering better rates of return than most savings accounts.

WEALTH ACCUMULATION IN RETIREMENT ACCOUNTS

The most common use for mutual funds is retirement. For as little

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