Advantage: Diversified Portfolios

• A mutual fund allows an investor to buy into a diversified portfolio of stocks or bonds with a single investment. Diversification avoids the investment problem of suffering a large loss from owning a single stock or bond that drops significantly or even loses all its value if the company files for bankruptcy. Many mutual funds own hundreds or even thousands of securities. Open-end funds are available that own shares across the broad stock or bond markets or focus on specific sectors or investment criteria.
  
  

Advantage: Professional Asset Management

• The securities in an open-end mutual fund are chosen by a professional investment managers. The managers of actively managed funds buy and sell securities to meet the fund's investment objectives. Index mutual funds buy securities to mirror a specific stock or bond index. Index funds also require the skills of professional investment managers to buy the correct securities for the funds and buy the securities at the best possible pricing.
  
  

Advantage: High Liquidity

• The definition of an open-end fund is a fund that sells and buys shares continuously for investors. Shares are purchased at a fund net asset value, or NAV, share price and shares are redeemed at the NAV. Note: load mutual funds may have a sales charge or redemption fee, but the buy and sell prices are still tied to a fund's NAV. All purchases and redemptions are accomplished directly with the mutual fund company. The proceeds from selling mutual fund shares will be available to an investor within a couple of days.
  
  

Disadvantage: Lagging Performance

• The large number of mutual funds means some funds and fund managers will outperform the market and their peers and other funds will under-perform. It is difficult to tell in advance which open-end funds will be the future winners. Mutual funds also have internal expenses that can be 1 percent or more of assets each year. The fund manager must overcome fund expenses as well as beat the market to provide superior returns. Index mutual funds attempt to match the market performance of the selected index. Index funds usually have lower expenses, yet these funds will never beat the market and the expenses will still keep the fund from matching the market returns.
  
  

Disadvantage: No Guarantees

• Stock and bond mutual fund returns will reflect the market returns of the securities they own. Both stocks and bonds can go down in value, and sometimes the entire market enters a down or bear market. The past returns of an individual mutual fund is no guarantee the fund will be able to repeat the same level of returns in the future. Open-end mutual funds are intended to be long-term investments and investors should understand there will be periods of negative return performance.
  
  

Disadvantage: Complicated Share Classes

• On the load fund side of the mutual fund universe, fund companies have developed a range of fund share classes. One fund may be available in class A, B, C and other share classes. Some classes are only available to certain investors such as in 401k accounts or to institutional investors. Load funds are sold by investment advisers. However, the investor should compare the sales charges and expense ratios of the different share classes. No load funds can have share classes also, usually based on the amount of money required to open an account.