Would you like to invest without worrying about choosing stocks and picking them yourself? Mutual funds are the answer: a way to own stocks in the stock market without bothering about choosing stocks. What exactly is a mutual fund? It's a portfolio of stocks, bonds, and/or cash run and controlled by an investment company on behalf of people who invest 
in it. The investment firm is responsible for the management of your investments and it sells its own shares to individual investors. When you invest in a mutual fund you therefore become a part owner of an investment portfolio, with all the other shareholders of that same fund. When you buy shares, the fund manager invests your money, along with the funds contributed by the other stakeholders.
The idea behind a mutual fund is great: the pooling of financial resources. Many people pool their money into a fund, which invests in several securities. Each investor shares in the fund's returns - the income paid on the securities and any capital losses or gains from the sales of securities that the fund holds.
Every mutual fund has a manager who will run the fund, also called an adviser or fund manager, who scouts around for securities and directs the fund's investments according to the fund's objectives, such as long-term growth, high income, or stability. Depending on its varied objectives, a fund may invest in stocks, bonds, cash investments, or a combination of these money and financial assets, and may have differing policies.
If you want to buy shares, for example, you just send your manager your money, and he will issue new shares for you at a recent price. This routine is done daily on a never-ending basis, which is why mutual funds are usually known as "open-end funds." And if the manager is doing a great job of scouting around for the best offers in the stock market, the net asset value of the fund will usually get bigger and, lo and behold, your shares will be worth more, and you will make more money.
As with any investment, mutual funds come with some pitfalls or disadvantages, and you should know those before you invest. Here I list some of the many pitfalls for your edification.
Mutual funds are regulated by the US Securities and Exchange Commission (SEC), which requires mutual funds to disclose information that an investor needs to make good decisions. Unlike bank deposits, mutual fund shares are not insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other US agency. This means that it is better to get a CD if one wants confirmed stability and security. In fact, the value of a particular mutual fund may even wildly fluctuate, even if the fund invests in U.S. government securities.
While diversification eradicates the risk of loss that would occur if you own a single security whose value goes down, it also limits the chance for making a lot money in the market if that security's value goes rapidly up. This is important to note. Diversification therefore cuts both ways, up and down. It's important to note here that diversification does not protect you from a loss caused by a decline in any stock markets. Diversification is not protection against loss; but rather it's a protection against not knowing what you are doing. Know what you are doing and you could wind up richer.
Mutual funds can be a lower-cost way to invest compared to buying individual shares through a broker. However, a combination of commissions and operating expenses at some fund firms will reduce your investment returns actually. That means that it is possible to make more money if you try to do it yourself. Compare the costs and fees of mutual funds; high costs and fees badly damage the returns you receive. The point is that while returns may not actually come about, the costs are sure and certain.
Nonetheless mutual funds are a great way to invest especially if you want a hassle free investment experience. I would say: invest in the stock market yourself, but if that's not your thing, get a mutual fund and reap the benefits.
By Shawn Seah
