Mutual funds - Better than individual stocks and bonds?

Of course, there's never one answer for everyone, but in general, investing in a mutual fund is better for most people - certainly the average investor - than buying individual equities and bonds. With a mutual fund, you get:

1. Skilled stock and bond pickers. A portfolio manager has experience in selecting holding and managing fund assets. When you own individual equities and bonds, you're your own portfolio manager.
   
   
2. Instant diversification. Divvying up your savings among your five or 10 favorite companies isn't going to cushion you sufficiently against a severe market downturn. Equity funds, however, own stock in 173 companies, on average. With a mutual fund, however, the diversification is done for you, which could help in a downturn.
   
   
3. More shares without paying more. By electing to have dividends and capital gains reinvested automatically, extra shares are purchased and folded into your account.
   
   
4. Convenience and simplicity. If you own a few funds within the same fund family, you can switch a portion or all of your savings from one fund to another. No need to fuss with paperwork, waiting for checks to clear, and so on.
   
   
5. Liquidity. Aside from tax considerations, if you want to redeem your investment, simply cash in your shares and you'll be fund-free by the next day. Unlike stocks, mutual fund shares are priced and sales are executed at the market's close, so you would have to wait until the next morning to stash them elsewhere. However, also unlike stocks, you don't have to wait for a broker to find a buyer for your shares. The fund will either resell the shares or buy them itself.
   
   
6. Low minimums. Hundreds of funds lower the minimum required deposits if you sign up for an automatic investment plan (AIP). As little as $50 is electronically deducted from your checking account once or twice a month and swept into the mutual fund.

There are a few downsides to funds, such as the lack of transparency. If you own individual stocks, you know precisely what you own and how much you own. Not so with mutual funds. So as not to tip their hand to competitors, holding are announced only periodically, usually when it's printed in the annual report, and by then the information may be outdated.

Another negative is taxes. When you sell individual equities, you pay capital gains tax on any profit. A fund sells its holdings throughout the year, generating capital gains tax. But even if you have not sold your shares, you'll be visited by the phantom Ghost of Taxes Present and have to fork over money to cover your portion of the fund's capital gains assessment.

The lack of transparency and the tax implications are inconvenient and will make April 15 even more unpleasant. But there's another downside to actively managed mutual funds, one that can so vastly inhibit the growth of your investment that it warrants a separate discussion.