Advantages and Disadvantages of Mutual Funds

Mutual Funds

Mutual funds are the funds from several investors used to invest in securities like bonds, stocks, money markets and other similar assets. Money managers control mutual funds and invest the capital of the funds in an attempt to produce higher capital gains and in turn, income for the investors. Mutual funds have numerous advantages, but on the downside, they also have some disadvantages that may make them not so great for certain investors. The advantages and disadvantages of mutual funds are as follows.

Mutual Funding - Pros and Cons

Mutual Fund Cycle

Advantages of Mutual Funds

Mutual funds have many pros and cons. They can be advantageous to certain investors despite the disadvantages. Those who wish to bulk up their portfolios or invest safely will find that mutual funds are a great avenue. They are also convenient and somewhat easy to understand. Here is a list of the major advantages of mutual funds.

  1. A money manager will handle the portfolio and will work towards improving the investments and earning a larger income off of the investments.
  2. Dividends paid out by the fund are then reinvested by the money manager to purchase more stock shares within that mutual fund. This enlarges the portfolio and income potential for the investor.
  3. Mutual funds are relatively safe to invest in. Since they are so diversified in their selection of securities, investors involved in mutual funds are not solely investing in one stock; they are investing in the group. Therefore, if one stock within the fund is not doing well, the other stocks will continue to grow the portfolio.
  4. They are easy to purchase and are fairly common. Prices do not fluctuate due to them only being traded once per day.

Disadvantages of Mutual Funds

While investing in mutual funds has its advantages, there are also disadvantages that need to be weighed before deciding where to invest. Fees and high expense ratios keep some investors away from mutual funds. The investor must be able to trust their money manager and taxes on the dividend payouts can make investors leery of investing in mutual funds. Here is a list of the major disadvantages of mutual funds.

  1. Management fees are charged by money managers to manage the investment portfolio.
  2. Funds whose expense ratios are higher than 1.2% are higher cost and will probably end up costing the investor valuable funds. Advertising fees and sales charges are also a part of a mutual fund. Some mutual funds do not have sales charges. Research the fund prior to investing.
  3. Having an untrustworthy money manager will end up costing you money. A money manager who is inexperienced and is not trading or selling correctly will also cost you money.
  4. Payouts on the funds are taxable and since the mutual fund’s payouts are uncontrolled and must be paid out, not rolled back into the fund, taxes are to be collected. This makes for higher taxation on the earnings from the fund.
  5. Mutual funds are generally only traded once per day and so they are generally considered to have poor trade execution. Investors who want faster execution times may not be satisfied with mutual funds.
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