Mutual Funds provide many advantages to investors in comparison with direct investments:
– Professional management is particularly important when direct investments are hard to find and must be managed.
– Allowing small investors to use the services of professional managers, whom they otherwise could not afford to hire.
– Allowing investors to share in the purchase and ownership of large assets, such as skyscrapers. This advantage is especially important to small investors who cannot afford to buy large assets themselves.
– Own diversified pools of risks and thereby obtain more stable, although not necessarily better, investment returns. Many indirect investment vehicles represent ownership in many different assets, each of which typically is subject to specific risks not shared by the others. For example, a risk of investing in home mortgages is that the homeowners may default on their mortgages. Defaults on individual mortgages are highly unpredictable, which makes holding an individual mortgage quite risky. In contrast, the average default rate among a large set of mortgages is much more predictable. Investing an amount in shares of a large mortgage pool is much less risky than investing that same amount in a single mortgage.
– Substantially less expensive to trade than the underlying assets. This cost advantage is especially significant for publicly traded investment vehicles that own highly illiquid assets; liquidity is one of the benefits of real estate investment trusts compared with real estate limited partnerships or real estate equity funds. Although the assets in which traded investment vehicles invest may be difficult to buy and sell, ownership shares in these vehicles can trade in liquid markets.
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