Mutual funds offer a handful of benefits to investors.

1. They don't demand large up-front investments.
If you have just $1,000 to invest, it will be difficult for you to assemble a varied group of stocks. For example, if you had $1,000 to invest and decided to buy one share of stock from the largest U.S. company, then one from the next largest, and so on, you'd run out of money sometime before purchasing the tenth stock.

If you bought a mutual fund, though, you would get much more. You can buy some funds for as little as $50 per month if you agree to dollar-cost average, or invest a certain dollar amount each month or quarter. (We'll cover different investment methods in an upcoming session.) You can make an initial investment in many funds with just $1,000 in hand; $2,500 will get you into most funds. If you invest through an Individual Retirement Account, you can often get your foot in the door with even less than $1,000.

2. They're easy to buy and sell.
You can buy mutual funds three ways: through financial advisors, directly from fund families, or via no-transaction fee networks, which are also called fund supermarkets. (We'll discuss these options in later courses.) But no matter how you buy funds, you can buy and sell shares quite easily--often with just a phone call or mouse click.

The exception: closed funds. Closed funds no longer accept new money, except, in some cases, from current shareholders. (In later courses, we'll discuss why some funds close.) Investors who own closed funds can sell at any time, though. And when you sell shares of a fund, you get cash in return.

3. They're regulated.
Mutual funds can't take your money and head for some remote island somewhere. This 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 big investors' tendencies to take advantage of small investors (to put it nicely), the government stepped in.

The 1940 Act is important to investors because it makes your mutual fund a regulated investment company (regulated by the Securities & Exchange Commission), and it makes you an owner of that company. Fidelity, for example, is a company that runs dozens of mutual funds. If you invest in one of their mutual funds--say, Fidelity Magellan FMAGX--you own a piece of the mutual fund, not a piece of Fidelity itself. Every mutual fund has a board of directors that represents the fund's shareholders.

Apart from a small handful, mutual funds are not insured or guaranteed. You can lose money in a mutual fund, because a fund's value is nothing more than the value of its portfolio holdings. If the holdings lose value, so will the fund. The odds of you losing all of your money are very slim, though--all of the stocks in the portfolio would have to go belly up for that to happen. And that is just not likely.

4. They're professionally managed.
If you plan to buy individual stocks and bonds, you need to know how to read a cash-flow statement or calculate duration. Such knowledge is not required to invest in a mutual fund. While mutual fund investors should understand how the stock and bond markets work, you pay your fund managers to select securities for you.

Mutual funds are not fairy-tale investments. As you will see in later sessions, some funds are expensive, others are poor performing, and still others are tax nightmares. But overall, mutual funds are good investments for those who don't have the money, time, or interest necessary to compile a collection of securities on their own.

Next: The Quiz >>