What Is a Mutual Fund Dividend?

Mutual funds are one of the most common investment vehicles chosen by so-called ''average investors.'' They give investors exposure to large groups of securities in a cost-effective way. For example, a mutual fund may own 20 or 30 different stocks (or more). Owning that many individual stocks would be expensive for investors, hence the benefit of mutual funds.

Mutual funds can give investors exposure to asset classes besides stocks. Bonds, commodities, foreign currency and other investments can all be owned through mutual funds.

Advantages of Mutual Funds

1) Professional management.
2) Cost-effective way of owning multiple securities.
3) Diversification across multiple sectors.
4) Ease of purchase--investors can buy and sell mutual funds through a broker just as you would buy a stock or bond.

Disadvantages of Mutual Funds

1) Fund managers often underperform the market. In theory, anyone of us could do a better job.
2) Costs: Mutual funds have minimum investments, loads and management fees.
3) Too many holdings. Often mutual funds own too many securities for one or two great performers to make much of a dent in the funds' overall performance.

Costs

1) The management expense ratio.
2) The cost of hiring the fund managers.
3) Fees to keep investors in the fund.
4) Administrative costs (mailing prospectuses, etc.).
5) Front-end loads (costs to enter the fund).
6) Back-end loads (costs associated with selling your fund).

How To Pick Your Fund

1) Define your investment objectives.
2) Identify a time horizon.
3) Know your risk tolerance.

Conclusion

Mutual funds are great tools for investors who don't have a lot of time to monitor their investments or are more conservative in nature. Active traders and those who embrace a challenge aren't likely to be satisfied with mutual funds or their returns.