Question

90% of mutual funds that are active and trying to “beat the market” do NOT succeed over the long-term and yet close to 50% of mutual fund assets are invested in these active funds. Why do you think investors choose to invest this way?

Answer 1

By investing a mutual fund the investor is saved the time of doing research and in case they lack the knowledge and tools to do the cost of acquiring them could exceed the 1-1.5% annual expense charges they pay to the fund manager.

Also, most people invest in mutual funds for the tax benefits in terms of IRA accounts for retirement which provide deductions upto $6000 and $7000 for people below the age of 50 and those above.

The return on mutual funds are much higher than other investing in fixed deposits though there is added risk involved with mutual funds.

They get diversification benefit, if you had $100 and a share of the company you want costs $50 and another costs $50, you can buy 1 share of each company. With mutual funds they invest in more than 20 companies and you receive the benefit of diversifcation in all of them as a mutual fund consists of pooling of a lot of money. Also, you can own a stock in proportion even if it costs $2000 a share or more even with $100 invested which you wouldnt be able to do if you went out to invest in your own.