What are investment funds?
A investment fund is a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.
What are the Advantages of Investment Funds?
The main advantages when investing in open end investment funds are:
Professional Management - The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you. Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.
Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.
Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis.
Professional management - According to the mutual funds definition, a fund is managed by an investment professional. These professionals have many years of experience investing in various securities.
Taxes
The fund is not a legal entity therefore the profits from investing in securities made by the fund are tax exempt.
But funds shares represent one kind of securities thus the difference between buying and selling commission minus of all other expenses and allowances is a tax basis.