By the same token, it's also easy to sell a fund. Unlike with many other security types, such as individual stocks, you don't need to find a buyer when it's time to unload your shares. Instead, the vast majority of mutual funds offer daily redemptions, meaning that the fund company will give you cash whenever you're ready to sell. Investors who own closed funds can also sell at any time.
3. They're regulated.
Mutual fund managers can't take your money and head for some remote island. Security exists through regulation set by the Investment Company Act of 1940. After the stock-market madness of the two decades prior to 1940, which revealed some big investors' tendencies to take advantage of small investors (to put it nicely), the government stepped in to put safeguards in place for investors.
Thanks to the 1940 regulation (often called "the '40 Act"), your mutual fund is a regulated investment company (regulated by the Securities and Exchange Commission) and you, as a mutual fund investor, are an owner of that company. As with other types of companies, mutual funds have boards of directors that represent shareholders. Among other duties, boards are charged with ensuring that the best available managers are running funds and that shareholders aren't overpaying for the managers' services. For example, the board of directors at Fidelity Magellan (FMAGX +0.20%, news)has hired Fidelity to run the fund on behalf of shareholders.
The fact that mutual funds are regulated shouldn't give investors a false sense of security, however. Mutual funds are not insured or guaranteed. You can lose money in a mutual fund, because a fund's value is based on the value of all of its portfolio holdings. If the holdings lose value, so will the fund. The odds that you will lose all of your money in a mutual fund are very slim -- all of the stocks or bonds in the portfolio would have to go belly-up for that to happen. And history suggests that such a mass implosion is unlikely in the vast majority of fund types.
4. They're professionally managed.
If you plan to buy individual stocks and bonds, you need to know how to read a company's cash-flow statement or assess the likelihood that a given company will fail to meet its debt obligations. Such in-depth financial knowledge is not required to invest in a mutual fund, however. While mutual fund investors should have a basic understanding of how the stock and bond markets work, you pay your fund managers to select individual securities for you.
Still, mutual funds are not fairy-tale investments. As you will learn in later sessions, some funds are expensive and others perform poorly. But overall, mutual funds are good investments for people who don't have the money, time or interest necessary to compile a collection of securities on their own.
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