A mutual fund is a pool of managed investments. These funds are usually managed by a portfolio manager to keep them in line with their investment objectives.
Why It's Important
The best way to think of mutual funds is as a basket. When you purchase shares of mutual funds, you are purchasing a basket of different stocks or bonds. I love mutual funds, and that's typically all I invest in.
Mutual fund benefits include professional management, diversification, liquidity, and brokerage commission savings. You are pretty much paying a mutual fund company to create a basket of stocks that meet your investing needs. For instance, you can find mutual funds of marijuana companies, international companies, and even companies that focus on sustainability. There were over 9,600 mutual funds available on the market as of 2018. So, there is plenty to choose from! You save on brokerage commissions because if you were buying individual stocks, it would be way more expensive. Some mutual funds have upwards of 3,000 stocks within them. If you were going to recreate that yourself, you would have to make at least 3,000 trades at whatever the commission rate is for the brokerage firm (currently ranging between free and $10) versus making one trade for the whole basket.
The only downside to mutual funds is that they carry fees. Of course, you would have to pay the company/investment manager for their work, putting the mutual fund together and keeping it updated. My rule of thumb is never to purchase a mutual fund above 60 basis points. To me, anything above that is excessive with so many options available.
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