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MUTUAL FUNDS

Mutual Funds

If you wanted to invest $2,000 in a blue-chip company such as GE, you would simply buy a few shares of its stock. Now suppose you wanted to invest in a few blue-chip companies because you believe that blue chips as a whole are good investments, but you don’t want to take your chances with one stock alone. You want to diversify so one disaster with a certain stock won’t ruin your investment. Perhaps companies such as GE, IBM, Boeing, Intel, and Alcoa would make it to your list. In this case you would have to spread your $2,000 between all these companies, which gets you fewer shares in each company than investing in one company alone. You would also have to pay separate commissions per each trade. You may not be able to use all of your $2,000, and you may end up with some leftover money (maybe $25) which may not be enough to buy a whole share of any of those stocks. And you would need to invest your time tracking and managing your portfolio. Maybe to make some adjustments by replacing Intel with Microsoft, or to bias your portfolio by allocating more money to IBM than others.

Now suppose you wanted to do the same thing with 10 stocks or 100 stocks, and also bring in other securities such as money market instruments, bonds, or even foreign stocks. Even if you spend all day trying to manage all this, handling such a portfolio would be prohibitively expensive. But don’t give up. …