Mutual fund investments involve investors who pool their money together to purchase securities and trade in stocks, bonds, and commodities. An investment company acquires individual savings from investors and then invests the capital in purchasing securities of other companies from which they earn profits. Mutual funds give investors the ability to invest in virtually all securities of other companies present in the financial markets ( Titman, Keown, & Martin, 2017) . The operation of mutual fund companies requires investors to buy shares in accordance with the company’s investment goals. In mutual funds, an investor is only allowed to buy and sell shares in the mutual fund by the mutual fund itself. This aspect differentiates mutual funds from the buying and selling of stocks. The net asset value (NAV) is the price that an investor pays or receives when he/she trades in mutual fund shares. The NAV is calculated daily and its value is a factor of the total value of the fund and the number of outstanding mutual fund shares ( Titman, Keown, & Martin, 2017).
Mutual funds are categorized into two; load mutual funds, and no-load mutual funds. Load mutual funds are usually sold through brokers, financial planners, or financial advisors. They are referred to as load funds because of the sellers apply a load fee (commission) when selling the ownership of the shares. Typically, the load fee applied in the selling of the shares ranges from 3% to 6% ( Titman, Keown, & Martin, 2017) . However, the commission may be sometimes higher. On the other hand, no-load mutual funds are mutual funds that do not have an applied commission when selling the shares. No-load mutual funds are usually sold directly by the investment company ( Titman, Keown, & Martin, 2017). Mutual funds have various operational structures. First, there is the open-end structure whereby an investor buys shares directly in the mutual fund itself. In this scheme, the company manages the issuing and redeeming of shares. Secondly, there is the closed-end mutual fund structure whereby shares are not redeemable. Also, managers cannot create shares in the closed-end fund ( Titman, Keown, & Martin, 2017) . Investors are, therefore, allowed to trade through shareholders. The third structure of mutual funds investment is the Unit Investment Trust scheme (UIT). A UIT is a mutual fund that is exchange-traded and usually has fixed securities with a definite life. UIT involves stock trusts and bond trusts.
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Mutual funds have proved to be beneficial to investors in diverse ways. One of the benefits of mutual funds is the aspect of diversification. Since investors bring their savings to a common investment company, the large capital accumulated can be used to buy stocks from various companies ( Titman, Keown, & Martin, 2017) . As a result, poor performance from one sector is cushioned by the better-performing sectors. Also, investing in bonds helps the investment company to prevent drops in stocks. Moreover, mutual funds benefit investors by taking advantages of the economies of scale. Since the investment company has more capital than an individual investor, it can buy many stocks for less. The company also has a higher selling power than an individual investor and also reduces the required transaction costs for investments. Other benefits of mutual funds include divisibility and liquidity ( Titman, Keown, & Martin, 2017) . With divisibility, the investment company usually invests a certain amount of money every month. These constant investments cushion the mutual fund portfolio from price fluctuations which would rather impact an individual investor adversely. Diversification in mutual funds helps investors to avoid serious losses especially when they trying to sell their stocks due to financial emergencies. Moreover, mutual funds are usually managed by professional investors ( Titman, Keown, & Martin, 2017) . This reduces the risk of losses in investment.
Agreeably, investors have also to bear costs in owning mutual funds. The widely known cost associated with mutual funds is the expense ratio. The expense ratio is used for marketing costs, management fees and distribution costs ( Titman, Keown, & Martin, 2017). One can identify the expense ratio from the current mutual fund’s prospectus. Transaction costs are also associated with owning mutual funds. Transaction cost includes brokerage commissions, spread costs, and market impact costs. Brokerage costs are incurred from the buying and selling of stocks by mutual fund managers on behalf of the investors. Brokerage costs are not easy to estimate. Market impact costs arise due to buying and selling practices done by investors or managers. The time for buying and selling stocks may make the business to incur losses. Sometimes investors may be affected by unfair stock pricing. The spread cost occurs when managers trade stocks on behalf of the investors. It is usually a reflection of the difference between the quoted bid price and the best-quoted ask price ( Titman, Keown, & Martin, 2017).
Mutual fund investors also pay taxes and even more taxes than they anticipated. For instance, an investor who buys mutual fund stocks that have already appreciated risks paying the taxes associated with the stocks ( Titman, Keown, & Martin, 2017). Sometimes, investors may be obligated to pay taxes for stocks that other investors benefited from. Therefore, it is a prudent measure for an investor to first investigate the gains tied to the stocks he/she wishes to buy. Other costs, associated with owning mutual funds are the cash drag costs, soft dollar costs, and advisory fees ( Titman, Keown, & Martin, 2017). Advisory fees come into play when investors rely on financial advisors trading.
Reference
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial Management: Principles and Applications (13th ed.). Pearson.
