What is the meaning of the world mutual funds? Mutual funds are the act of collecting funds from a group of investors for the sole purpose of combining those funds for investment in various types of markets. The markets that will be invested in is the responsibility of the mutual fund manager. Fund managers normally have a benchmark that they use as a guide as to the areas they will be investing in.
Compared to other types of popular investments, mutual funds do have a distinct advantage. Diversification. A wide range of investments can be had with a single investment. There is the added benefit of professional supervision as well from the fund manager. Individuals who have neither the time nor the means to invest on their own reap the rewards in this case.
There are some disadvantages to mutual funds which we will touch on now. Over-diversification. Sometimes the opposite is true, not enough diversification is the problem. Also, fund managers have their fees plus commissions should the fund turn a profit. The price and commissions incurred for the best fund managers are usually pretty high as well. And if the mutual fund tanks, they lose nothing but perhaps their reputation and in the worst case scenario, their jobs. Either way, they will not be paying a penny to the fund.
Since you are entrusting your hard earned money to them, there will questions of trust. At the end of the day, who is the fund manager really? Who is this guy telling me how I should invest my money? Is he really qualified? Or is he a stooge hiding behind a fancy suit? After all, they all vary in their performance statistics as well as specialties. They could be great at their specialties but then you lose out on diversification. Consider as well, the speculative nature of the markets. There will always be losses, the idea of the game is to turn a profit more often than you turn a loss. This is true of all investments. As such, there are always risks that you come out with a loss instead of a profit.
In the end, mutual funds are still a great form of investment for those without investment knowledge. The difficulty lies in picking the right fund manager and company. Generally, mutual fund companies that consistently return profits have very high fees and commissions to go along with their performance. In my country, Malaysia, the top dogs are Public Mutual and CIMB and they charge hefty prices for their services. But then again, quality never comes cheap.