by Miriam Dunn

Created on: June 15, 2007   Last Updated: June 13, 2010

Mutual Funds, unlike an individual stock,  can provide built-in balance to an investor’s portfolio in order to withstand the ups and downs of international financial markets.

Investing in a mutual fund will lend stability to your portfolio because a mutual fund is a "company" that invests in a variety of products, is managed by a professional, and can range from low-risk to high-risk, depending on the intent of the fund.

Active Professional Management:

A typical mutual fund is like a company. Let's call it the "XYZ Fund". We can buy "shares" or "units" of XYZ, which in turn buys financial products of other companies such as stocks, bonds, or both.

The Manager of XYZ Fund is a professional who specializes in the research of company portfolios and makes purchasing decisions based on a variety of data including potential earnings forecasts. This kind of research and understanding is not something the average person can do on their own. (An Index fund is an exception to active-management).

Why built-in balance?

The fund manager pools money from its investing members and makes large purchases in stocks, bonds, or a mixture of various other options according to the funds purpose. These purchases are much larger than an average person could or would transact. This feasibility enables investors to have stock shares in many companies that would otherwise be prohibitive. 

Risk Variability

There is a fund to fit most tastes, from low-risk to high.

Each fund has its own niche which can range from t-bills to small capitalization companies to government bonds to precious metals. Funds may also have a geographical specialization, focusing on Latin America, or Japan, for instance. It may focus on established dividend-paying companies or even bill itself as an “ethical” or “green” fund in which case it is careful of its product selection in terms of the environmental impact companies have.  

Most funds will have Management fees but they are relatively low, and built into the fund so are not taken directly from investors, These fees are becoming increasingly competitive; a typical fund fee ranges from 1.25 to 3%. The management fee is a small overall factor in choosing your mutual fund. After all, the better the management, the more likely the fund will perform.

General economic conditions, global situations, earnings forecasts, government instability, wars, commodity prices, politics – even the season – can cause stock prices to fluctuate. That’s why having a balanced investment portfolio is so important. Unless one is fabulously wealthy or has a stomach for financial upheaval, an economical way to get balance is through a mutual fund.

There are many other considerations to fund selection, such as your personal tax situation, but the basic keys to designing your appropriate portfolio takes into account your length of time to invest and your risk tolerance. Mutual funds will fluctuate in value, reflective of general market conditions but active management by a professional can enhance stability .  The higher the risk, the increased chances of a windfall but lower risk is more stable, and may outperform high-risk funds in the long term.

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