Mutual funds have grown in popularity over the past several decades for many reasons. They are used by investors of all stripes to accomplish many different objectives, and their flexibility and convenience have made them the investment vehicle of choice for a large percentage of financial advisors both domestically and worldwide. Here are 10 key reasons why mutual funds have earned this status.

10. Diversification

Mutual funds allow investors to purchase a broadly diversified portfolio that in most cases would require hundreds of thousands of dollars of capital. But because each share of a fund represents a proportionate undivided interest in all of the securities that are held by the fund, every investor becomes the owner of a tiny portion of the entire fund portfolio.

Be sure to also read the 7 Questions to Ask When Buying a Mutual Fund.

9. Cost Efficiency

Every order to buy or sell a security usually charges a commission. Individual investors who create their own portfolios can therefore expect to incur substantial transaction costs, especially if they intend to trade in and out of some or all of their holdings on a regular basis according to their investment plan. However, economies of scale allow mutual funds to do this much more cheaply, which substantially reduces these costs to individual shareholders.

Be sure to see the Cheapest Mutual Funds for Every Investment Objective.

8. Divisibility

Unlike shares of individual securities, mutual funds allow investors to purchase fractional shares. This makes it much easier to set up systematic purchase programs of a set dollar amount, such as $250 per month. Every cent will be used to purchase fund shares, as opposed to being left with a probable surplus or deficit that would result from trying to buy a specific number of shares or units of an individual holding.

7. Better Access

Mutual funds allow investors to participate in areas of the market that they would otherwise be completely unable to reach in many cases, such as stocks of foreign companies or derivatives or other hedging instruments that most uneducated investors aren’t aware of. For example, a novice investor who wishes to dabble in commodities futures contracts could do so through a mutual fund that invests in this arena.

6. Professional Management

All mutual funds are run by professional portfolio managers, many of whom have earned the rigorous Chartered Financial Analyst credential. These managers typically have years of experience managing large portfolios and are able (and required to) make objective investment decisions that will help the fund achieve its objective. They are bound by a strict fiduciary charter that requires them to act solely in accordance with this objective with every transaction that is executed. Portfolio managers are also unable to discriminate between shareholders or offer better returns to one class of share than another, except in the case of funds that offer declining sales charges for larger purchases.

Be sure to also read A Brief History of Mutual Funds.

5. Liquidity

Investors who need to get their money quickly can expect to receive their sale proceeds no more than three business days after they place a sell order. These funds can be automatically transferred to their bank accounts in most cases. Owners of closed-end and exchange-traded funds can also sell their shares any time during market hours and receive their proceeds three business days later when they trade settles. There are also instances when same-day settlement is available.

4. Selection

There are several thousand mutual funds currently trading in the marketplace that invest in all manner of securities to achieve a wide range of investment objectives. Investors who are looking for growth, income, tax efficiency and/or capital preservation have many options to choose from. Funds that assess sales charges also come in several different share classes that charge this fee either up front or when shares are sold within a certain period of time. Some funds are designed solely for institutional investors while others can be purchased by any person or organization.

Learn more about How to Research Mutual Funds.

3. Adherence to Investment Objective

All mutual funds are created with a charter that clearly states the official investment objective that the fund seeks to achieve, such as growth or income. Some funds contain both a primary objective and an ancillary objective, such as capital growth with additional income from stock dividends. As mentioned previously, the portfolio managers can only perform transactions that directly meet this objective and cannot deviate from the fund’s stated goals.

2. Transparency

Mutual funds are required to list out at least their major holdings if not their entire portfolios in their prospectus. They are also required to provide the names and professional experience of each of their portfolio managers, as well as a complete breakdown of fund expenses, transaction costs, portfolio turnover and other technical data that determine fund performance. Exchange-traded funds are typically composed of a set portfolio of holdings that seldom change, and these are likewise listed by the issuer either in a prospectus or online.

See also ETFs vs. Mutual Funds: The Similarities and Differences.

1. Tax Reporting

All mutual funds are required to keep track of the amount of dividends, interest and capital gains and losses that are passed on to each shareholder on an annual basis. It is not possible for the shareholders to calculate these amounts themselves, because they are generated from the internal machinations of the fund portfolio. The funds therefore send the appropriate 1099 forms to all shareholders during tax season. Many funds also keep track of each investor’s cost basis and include this information on the tax forms. Funds that do not do this must still provide periodic statements to their shareholders that reflect all purchases, redemptions, exchanges and other fund activity, and clients can use these statements to glean their cost basis or other necessary tax information.

The Bottom Line

These are just some of the reasons that financial advisors turn to mutual funds for so many of their clients. Funds can also provide valuable educational tools for shareholders that can help them to see how much they need to save in which funds in order to accomplish a given objective and other resources designed to help clients achieve their financial goals.