Mutual funds offer several key advantages over individual stocks, which can make the management fee very worthwhile.

1)
A professional skilled in choosing stocks does all of your work for you.

Manages of stock mutual funds spend their entire day determining which stocks to by and sell. They have instant access to information about every stock around the world at the push of a few computer keys. They work in companies where teams of research analysts pore over corporate quarterly and annual reports and managers and analysts visit company executives and factories to evaluate the firms’ prospects first hand. You have almost no opportunity to become as knowledgeable as these fund managers without quitting your job and taking up investing full-time.

2)
A mutual fund gives you instant diversification.

If you have only $1,000 to $5,000 to invest, the money will not buy many shares of a single stock, and it will certainly not buy many different stocks. By putting your money in only two or three stocks, you are exposed to the possibility that one of them will plummet in price, wiping out much of your investment capita.

Instead, when you put your $1,000 or $5,000 in a mutual fund, your money buys into a portfolio that may comprise 50 stocks, or maybe 500 different issues. If one or two stocks in the portfolio get hit hard, your losses will be much more limited because many of the other stocks will probably be going up at the same time.

3)
A fund exists for every financial goal and risk tolerance level.

Armed with our goals and risk level, you can find a fund that fits your situation. In broad terms, there are funds designed for various degrees of growth and for varying levels of income, as well as funds that combine both growth and income objectives.

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This is an excerpt from my book, Everyone’s Money Book.