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Advantages Disadvantages To Mutual Funds
Investing in mutual funds is something every fund manager will advise you. He will say that they are the best way of saving taxes. However, there are advantages and disadvantages to mutual funds and you should know and understand them before you invest your hard earned. |
Advantages to mutual funds are generally diversification, convenience, liquidity and professional management of your funds. The disadvantages of mutual funds include risks and associated costs.
Advantages to Mutual Funds
- The biggest advantage of investing in mutual funds is diversification. In reality when you invest in a single mutual fund, you are actually investing in many securities. Once you investment is spread across many securities, you reduce the risk. If a few securities in your portfolio end up losing value, you still have other securities to look forward to.
- You get the benefit of having your mutual funds managed by investment professionals. Your mutual fund manager will decide when to buy or sell securities based on the fund’s objectives as mentioned in the prospectus. While do so, he will take many factors into consideration including the current market situation.
- If you want to buy or sell shares of your mutual fund, you can do it conveniently by telephone, internet or mail.
- You do not require too much money to do an initial investment. Most mutual funds have a minimum initial investment of $2,500. However, you can even find funds which have much lower minimum initial investment, for example a mutual fund in an IRA.
Disadvantages to Mutual Funds
- Mutual funds have high risks and costs associated with them. The change in the market conditions can cause fluctuations in the value of the mutual fund investment. In addition, there are fees and expenses associated when you decide to invest in mutual funds. Usually these fees and expenses are not incurred when directly purchasing individual securities.
- There are no guarantees with mutual funds. Mutual funds are not guaranteed or insured by an agency. There is every possibility that your mutual fund might end up worth less than the amount invested initially.
- In case you have purchased a taxable mutual fund, you will have to pay taxes on capital gains. That is why you have to look at net gains when comparing performances of mutual funds.
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