Like the other existing investments, mutual funds do have their advantages and disadvantages. It is important to know these before you make your final decision and invest in mutual funds. Doing your research is a vital action on your part. In this post, both the advantages and disadvantages of mutual funds will be presented to help you decide rationally and sensibly.
Definition of Mutual Funds
Mutual funds are a type of investment vehicles comprised of a pool of funds from several investors to meet the purpose of investing in a number of securities like bonds, stocks, currency exchange and other similar assets.
These are being managed by money managers (those who are in-charge of investing the fund’s capital to generate capital gains and achieve profits for the investors). The investment portfolio is structured and conserved in such a way that it matches the objectives of the fund as specified in its prospectus.
Advantages of Mutual Funds
- Instant Diversification
Mutual funds invest in a wide array of securities. If you are aiming for a diversified portfolio, then investing in mutual funds is for you. A mutual fund can offer you with a basket of stocks.
- Account Size Does Not Matter
It is perfectly alright if you have a small-sized investment account or if you only have limited capital to begin with, since a mutual fund offers you a wide range of exposure to several stocks, you do not need to buy such stocks yourself. Once you, chose a mutual fund, you are given access to diverse portfolios and to participate equally in the gain or loss of the fund.
- Specialized Money Management
Fund managers are considered as experts in the investing field. Hence, mutual fund companies have more capability and resources than the average individual investor.
Disadvantages of Mutual Funds
- Intraday Trading Not Possible
The “NAV” price is unknown, thus, you cannot really employ intraday trading strategies. It makes intraday trading impossible on sudden price movements in the market.
- Loss of Connection
In mutual funds, the investment decisions are not reliant on you. Chances are your decision would not be regarded unless you will be called for some quarterly investor calls and updates. This in turn translates to a lack of interpersonal connection both to your account and to the people in charge of the fund. It can mean difficulty for you when managing your portfolio. The decision to buy or sell an asset is dependent on your manager.
- Costs are an Issue
Costs are a part of a mutual fund’s reality. As a matter of fact, such costs can decrease your overall profits.
- Fluctuating Earnings
The possibility that the value of a mutual fund will decline is high. Like other investments, you might end up with no return at all. This is due to the fact that mutual funds are affected by the price fluctuations of the stocks that constitute the fund. It does not mean that it is being run by a professional manager, the performance would be impressive.
- No Insurance
Mutual funds are not insured against losses – therefore, there is a possibility that losses can occur or even losing your entire investment.
Mutual funds both have the gains and downsides, and as an investor, you should be able to evaluate such carefully. The probability of success in a mutual fund tends to increase if you know what you got yourself into and if you totally understand the basics.
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