A mutual fund is pool of money from various investors that is actively managed in the ultimate goal of creating wealth and benefiting shareholders.  While many people associate mutual funds with stock, in actuality, mutual funds can consist of stocks, bonds or even cash.  So what are the benefits of mutual funds?  Why wouldn’t I as an individual investor just go out and buy the stock or bond on my own?
First, the average individual investor does not have the purchasing power to mimic mutual funds.  Most mutual funds consist of tens to hundreds of stock or bond positions.  It would be extremely difficult (and cost inefficient) for a single person to attempt to buy positions in that quantity.  Also, buying pooling together money collectively, this allows the group of investors to be able to afford an asset manager.  The asset manager is in charge of controlling the mutual fund and making decisions in the best interest of the shareholders.
The second advantage of mutual funds is the diversification that it offers investors.  The term diversification is thrown around a lot in the investment world and it is an important concept.  There is an inherent risk associated with each specific position.  However, by spreading the risk across a hundred positions, you are drastically mitigating your risk.  Even if one company were to go bankrupt, you would still have ninety nine other positions holding ninety nine percent of the funds value to offset and minimize any losses.
Mutual fund asset managers are professional investors whose sole responsibility is to make the fund the most profitable it can be under its guidelines.  The average investor does not have the time, training or experience to make the daily decisions that asset managers encounter.  Traditionally, asset managers are proven performers within their company and have shown a track record of success.
Another advantage of mutual funds is the liquidity that they possess.  While most stocks trade while the market is open, mutual funds usually trade once a day.  However, for those that need to sell their positions and cash out, this can be done fairly quickly compared to Certificates of Deposit (CDs) certain bonds (municipal/government).  Mutual funds can be traded once a day at their daily Net Asset Value (NAV) and are lauded by many for the liquidity that they encompass.
Mutual funds are one of many different investment vehicles.  However, mutual funds are the proven choice for many investors because of its ability to mitigate risk, its professional guidance and its liquidity.  When properly researched and understood, mutual funds can be a great asset to any investor’s portfolio.