Mutual funds are some of the best investment tools for any investor, experienced or not. In particular, they are excellent for investors that are just getting started, as it allows them to do some different things that they can’t do with just individual stocks. There are many advantages to owning mutual funds rather than individual stocks, but the two biggest ones are Diversification and reduced transaction costs.
Since you will be buying into a fund that is investing in lots and lots of different stocks, you should be pretty well diversified (obviously depending on the fund), which will help shield you from risk. Think of it this way… if you own one stock and it goes down by a lot, then your whole portfolio (consisting of one stock) will be way down, and you’ll lose a lot of money. However, if you own a lot of stocks (like in a mutual fund), and one goes down, you will offset that by all of the other stocks. Maybe the reward of a 200% return isn’t realistic, but at least this way you won’t be losing all of your money (like you would have done if all of your money was invested in Enron). Having a well-diversified portfolio can help protect from market risk no matter what the market is doing.
The other key is the low transactions costs. If you were trying to buy all of the stocks individually, you would probably have to pay a fee every time you made a purchase, which would add up to a lot of costs that might eat up any returns you may have, especially if you’re only investing a relatively small amount of money. With the mutual fund, you pay probably a small fee (about 1% or so) for the whole year, and that is all. Much cheaper fees which allows you to save your returns.
If you have a little bit of money and are looking to get started, the advantages of mutual funds are evident. With just a small amount of money, if you’re trying to buy individual stocks, it’ll cost you a lot in fees and you will not be able to properly diversify. However, if you own mutual funds, the advantages will be obvious in the diversification and low fees. These are the big benefits of mutual funds.