Most of us do not have the time or inclination to manage all of our investments. Putting cash into a simple money market account and watching our monthly earnings is one thing, but being responsible for a large portfolio of different securities is quite another. Mutual funds can be an effective way for you to achieve instant diversification of your investments while relying on the expertise of professional money managers to do the hard work.
Let's start with a basic definition. A mutual fund is a professionally managed fund that invests money from you and other shareholders in a group of assets, such as stocks, bonds, commodities, or other securities. You, together with other investors who share similar financial goals, contribute cash to a particular mutual fund. A fund manager then administers this pool of invested money, deciding when to buy and sell fund assets based on market conditions to in an effort to maximize the fund's earnings. That's the heavy lifting part. If you are a beginning investor, having experts manage your money can be a big plus by offering you greater confidence.
An average mutual fund might hold hundreds of different securities. So when you invest in a mutual fund, you hold shares in a greater variety of assets than you could by only investing in one or two stocks on your own. Because you are not investing in a mutual fund alone, you can create a more diversified portfolio for yourself at a relatively lower cost. Mutual funds can be a cost-effective way to potentially increase your expected returns (given the mix of assets) while minimizing your risk (since you are not putting all of your eggs in one basket). Keep in mind that diversifying your portfolio does not ensure a profit or protect yourself against a loss.