These are few of the advantages and disadvantages of mutual funds. Each investment has benefits and risks. However you must remember that the features one investor values may not matter much to another investor. The specific feature beneficial to you will be decided by your particular circumstances.
Some investors find mutual funds a lucrative investment, since they usually have the following features:
Professional Management:
Professional money managers research, choose, and regulate the performance of the securities bought by the fund.
Diversification:
Diversification is a fruitful investment strategy that can be summarized as not putting all the eggs in a single basket. Dividing your investments across many companies and industry sectors can reduce your risk if a company or sector underperforms. For some investors, diversification can be easily achieved by owning mutual funds instead of buying individual stocks or bonds.
Affordability:
Some mutual funds allow investors with smaller amount of funds to invest by lowering the pound amounts for initial purchases, future purchases, or both.
Liquidity:
Mutual fund investors can easily sell their shares along with any fees and charges payable if any while redeeming.
But some features of mutual funds can also be treated as disadvantages like:
Costs despite Negative Returns:
Investors must bear sales expenses, annual fees, and other expenses irrespective of the fund performance. Also based on the timing of their investment, investors might have to pay taxes on capital gains distribution they get, even though the performance of shares worsened after they were purchased.
Absence of Regulations:
Investors find it difficult to determine the actual components of a fund’s portfolio at any point of time nor are they able to influence the buying and selling decision of securities taken by the fund manager or when those transactions take place.
Price Uncertainty:
For an individual stock, you can get real-time (or close to it) pricing information easily from financial websites or your broker. You can regulate the fluctuations in hourly or secondly stock’s price. But for a mutual fund, the buying or selling price of the shares will usually depend on the fund’s net asset value that the fund may compute long after you have placed your order.
As any type of investment carries a certain amount of risk, it is better to consult a professional before taking any decisions.