It Gives Access to a Manager Picking Stocks For the Investment Strategy
A mutual fund is a financial vehicle where various investors elect to pool their money together with a designated fund manager who will select stocks or other investment securities for the fund. The fund manager’s ultimate goal is to outperform a designated benchmark.
The S&P 500 is usually a common index to use as that benchmark but it can depend on the specifics of the fund itself. For example, the fund might be concentrated in emerging markets, large-cap growth, mid-cap growth, or even just focus on particular industries like health services, consumer staples, or biotechnology.
A Bit More Expensive so Find a Fund with a History of Success
Mutual funds are usually active in terms of management style and will require higher fees for investors to compensate for the overhead cost of actively trying to outperform a designated benchmark. However, similar to how ETFs can at times be actively managed, mutual funds as of today can technically be passive in their management style with lower fees as well.
It is important to ensure that appropriate research is conducted when deciding to invest in a mutual fund because of the associated fees. While there are fees, they are typically much lower than a hedge fund or other management fees.
The reason this is important to consider is because most fund managers actually do not outperform their respective benchmarks. You have probably heard how most active investors do not outperform the S&P 500 itself.
However, in less efficient markets such as emerging markets or small cap, mutual funds might find it easier to outperform.
This holds true for most mutual fund managers also, but a mutual fund will give you access to a diversified portfolio of securities as opposed to you trying to build a diversified portfolio yourself. It is important to seek mutual funds that have a long track record of success.
