While a lot of sites will nitpick mutual funds, complaining about the 1% fee or so, the truth is that by investing in a good mutual fund, that 1% fee will go a lot further saving you money down the road by preventing you from making your own mistakes than the amount you pay the fund family.

All investors want to beat the market; few people are happy just tracking the market. Yes, it’s irrational since it is very difficult to beat the market, but that is the truth. Most just are not happy keeping their money in an ETF.

Therefore, many investors start buying and selling stocks on their own. Often, this can lead to disaster. Investors will often get too aggressive during good times and then panic during bad times; they’ll buy high and sell low. Investors will often overleverage, borrowing far too much on margin.  Investors will often not diversify, sometimes they won’t even realize how undiversified they are.

The hidden advantage to mutual funds is that a mutual fund prevents a lot of these mistakes. Mutual funds, since they often hold hundreds stocks, are a form of instant diversification.  By being able to ‘choose’ a mutual fund, an investor can satisfy his or her desire to beat out other investors, while at the same time not be lulled into situations where he or she will buy high and sell low.

In short, mutual funds can often save you from yourself. That’s where the 1% fee really is going towardis, insurance from yourself.

Hedge funds are also a viable option for some investors that are looking for ways to mitigate risk and drive solid returns. Firms like GoldenTree Asset Management can provide additional information about these investments.

Mutual funds allow you to invest your money in the stock market without doing any work yourself. Most people do not have time to track the market and decide which stocks are good buys and good sells. When you invest in a mutual fund, you give your money to a professional to invest it for you. Hopefully, he will invest it well.

Mutual funds are instant diversification. Most mutual funds invest in several hundred stocks. Taking the time to have your portfolio properly diversified yourself takes considerable time and effort. Just investing in one mutual fund will generally provide yourself with a significant amount of diversification.

Mutual funds allow you to invest in exotic areas. It’s difficult for an American investor to invest overseas, particularly in areas such as foreign small caps and emerging markets. Mutual funds provide access to these markets.

Here are a few reasons why you shouldn’t invest in mutual funds:

Most mutual funds don’t beat the market. Instead of investing in a mutual fund, just randomly picking stocks can yield better returns in the long run. An effective way to beat most mutual funds is to just invest in a broad market ETF, such as an S&P 500 tracker (like IVV or SPY).

Mutual funds charge significant fees, often exorbitant fees. Beware of paying too many fees when investing in a mutual fund. Obviously, a mutual fund must charge for the privilege of investing your money for you. But, some mutual funds simply charge too much.

Never pay a load. Practically all funds that charge a load are not worth it. You are just paying an extra fee, which is likely going into the pockets of whoever is trying to convince you to buy the mutual fund.

Keep the expense fee small. Make the mutual fund justify the expense fee. Don.t just blindly pay fees. Anything you pay detracts from the returns you can make. It might not seem like a big deal to pay a 1.5% fee instead of a .8% fee, but it can add up to a lot over the long run.

Don’t buy too many mutual funds. A mutual fund in of itself is diversified. Most mutual funds invest in over a hundred different stocks. You don’t need to invest in multiple mutual funds that target the same asset type (such as large cap growth stocks).

Be wary of very large mutual funds. When a mutual fund gets to be a large size, it becomes more and more difficult to invest its investors’ money. Try to invest in mutual funds with a $5 billion or less in total assets, even smaller if it’s a small cap targeted fund.

Consider buying an index fund. Most mutual funds don’t beat the market. An easy way to get returns is to just mimic the market by buying an index fund.

These funds are similar to the inverse ETFs. They track the opposite of the market. So when the market goes down, these funds go up. When the market goes up, these funds go down.

Most of the time, when people bet against the market, they either short a standard ETF, like SPY, or they buy an inverse ETF like SDS. Note: SDS is a double daily inverse ETF, so it does double the opposite of the market. If the market goes up 1%, SDS goes down 2% and vice versa.

However, you can get inverse exposure through bear market mutual funds too. Like inverse ETFs, there are all sorts of inverse mutual funds. There are some that do the opposite of the S&P 500, like RYTPX, whereas others are more specific and do the inverse of a certain sector, like SNPIX, which is a short of the oil and gas industry.

While these funds may seem attractive now since the market has just been absolutely pummeled this year, remember that the stock market does tend to go up over time. While this year has been one for the books, the worst year since the Great Depression in fact, you have to ask yourself how much lower you really think the market may go. Most of the bear market mutual funds are leveraged too, meaning you get double exposure. So if the market has a sudden and fast rally, you will find yourself losing even more money.

Fidelity: Always having been one of the largest fund families, Fidelity offers many mutual funds. I’ve personally invested in quite a few of these, and they tend to have solid returns compared to their peers. What I like about Fidelity is that they have many funds with no loads and tolerable expense ratios. They also have an excellent S&P 500 index fund, FSMKX. Their Contra Fund, FCNTX, is insanely large, though still manages to perform well.

Bridgeway: A small fund family that I think deserves a second look from most investors is Berkshire. They are highly rated by the Motley Fool, and they offer quite a few solid funds with low expense ratio. They also have aggressive mutual funds, which make potentially good investments for people willing to leave their money in the market for a long time.

Franklin Templeton: One mutual fund family I can’t recommend is Franklin Templeton. Loads and high expense ratios are the name of the game based on my experience. When I was younger and had less stock market experience, my banker talked me into investing into one of their funds (it had a load). My guess is his recommendation was based on whatever kickback he or the bank got.

Vanguard: Unlike most fund families, this group solely runs index funds. Their low expense fees and solid performance makes Vanguard a great choice. You can read more about index funds in our index funds article.