mutual funds

The Advantages and Disadvantages of Mutual Funds

Despite the popularity of mutual funds, they have both advantages and disadvantages. Wise investors take the time to understand their investments before committing their capital. Understanding the advantages and disadvantages of mutual funds will make you a better investor.

Advantages of Mutual Funds

Easy Diversification - Many mutual funds are actively managed portfolios that are well diversified. Funds are diversified with the objective to improve performance through seeking the highest rate of return at the lowest possible risk.

Professional Portfolio Management - When investing in a mutual fund, your money will be managed by a professional investment team. More often that not, these money managers have plenty of experience, education and a dedicated support team.

Liquidity - Mutual funds provide their investors the ability to buy and sell shares whenever they want or need to. This can prove to be a real advantage in times when optimal buying or selling conditions exist in the marketplace.

Reinvested Earnings - Exponential portfolio gains can occur when earnings (realized gains and dividends) are reinvested into new positions. Mutual funds make it easy to reinvest your earnings, many ask you if you would like to reinvest earnings when opening a new account or position.

Disadvantages of Mutual Funds

Fees and Expenses - The advantages of mutual funds, such as professional management, come with a price. Funds with low management requirements like index matching funds have lower fees and expenses, whereas niche funds will require higher maintenance and will come with a higher cost.

Not Insured - Unlike savings accounts, investments in money markets and certificates of deposits, the capital you place in a mutual fund will not be insured by the FDIC against loss. The value of your mutual fund will rise and fall alongside the stock market and losses can be sustained in the short and long-run.

Below Average Performance - Unfortunately most mutual funds underperform common market indices such as the S&P 500 and Dow 30. In light of this fact, its sometimes better just to invest in a variety of different index matching ETFs.

Limited Investing Strategies - Mutual fund managers are limited in the types of investments that they can make, this often limits their ability to take advantage of strategic opportunities such as buying options and shorting stocks. This is one of the main differences between mutual and hedge funds.

Investing in mutual funds comes with a few advantages and disadvantages. However in most circumstances (and financial plans) the pros completely outweigh the cons.

An Introduction to Mutual Funds

Mutual funds are one of the most popular investment vehicles around the world. This is due to ease and convenience of contributing to mutual fund accounts, their broad diversification and reinvested earnings. Allocating a portion of capital to mutual funds is a great idea for beginners and seasoned investors alike.

Mutual Fund Management

Simply stated, a mutual fund is professionally managed portfolio of stocks and or bonds. Mutual fund managers pool all of the capital received from investors and invests it on their behalf. In exchange for the capital mutual fund investors receives shares of the mutual fund.

Mutual funds offer access to the expertise of professional investment managers without the high price tag of hedge funds and other investment managers. Mutual fund managers are usually supported by a team of investment analysts who help research stocks and determine which holdings to buy and sell.

A Few Types of Mutual Funds

There are probably more than a thousand mutual funds available to investors. However, most of these funds can be categorized in a few different themes. When mixed and matched, these themes can provide excellent diversification across stocks, sectors and asset classes.

Mutual fund portfolios can be constructed with value, growth or income as an objective. Funds can also be built using international stocks, domestic equities or a combination of both. Some funds also tailor to smaller niches, like green energy investments or rare earth minerals.

Fees and Expenses of Mutual Funds

Some mutual funds charge a front-end load or back-end load. Mutual fund loads are sales charges that can be compared to a commission. It’s commonly assumed that load mutual funds are not a good investment and that no load funds are superior. As an investor you should consider funds that provide great returns year in and year out regardless of the fee structure.

Mutual funds can also charge it’s investors a management fee. Management fees are reflected in the value of each share of the fund, thus you will never receive a bill for a management fee. Management fees cover the operating expenses of the portfolio management company and individual fund.

Mutual funds provide great opportunities for both beginners and seasoned investors. Like investing in stocks and bonds, its a good idea to do your research before investing in a mutual fund.