Understanding the Appeal of Mutual Funds for High-Income Households

Although 44% of U.S. households own mutual funds, the rate of ownership is much higher among households with incomes above $100,000 (see chart).¹

What is it about mutual funds that attracts affluent investors?

Professional Management

When you purchase shares in a mutual fund, to some extent you are also buying the expertise of the fund manager and the fund management company, which are tasked with buying and selling investments to give shareholders the highest possible return consistent with the fund’s objectives. Fund managers carefully research the assets held by their funds, often by poring over financial statements and meeting with a prospective company’s management to discern whether it would be an appropriate addition. Although you may have a certain dollar amount riding on the fund’s performance, it’s likely the fund managers have an even bigger stake: their reputations.

Flexibility

Regardless of your financial goals — retirement, college, a wedding, a rainy day — it’s likely that there is a mutual fund that may be appropriate for your situation and risk tolerance. Mutual funds enable you to customize your portfolio and make adjustments when your market outlook or investment goals change. If you decide you need to redeem some of your shares, your assets could be available as early as the following day. Some funds allow you to write checks against your account.

Diversification

Of all the strategies recommended for managing risk, diversification is near the top. Mutual funds can invest in a wide range of asset classes, industries, and securities. In fact, some mutual funds invest in hundreds of securities, providing a level of diversification that could be cost-prohibitive even for high-income and high-net-worth investors. Diversification does not guarantee against loss; it is a method used to help manage investment risk.

The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.