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Advantages and Disadvantage of Mutual Funds

Advantages and Disadvantage of Mutual Funds

Every little thing in life has its pros and cons, so it makes sense that mutual funds would have some advantages and disadvantages as well.

There are some things that we can always expect from mutual funds: professional money management, liquidity, and instant diversification. However, at what cost will we get all of this?

We teamed up with Best Mutual Fund Advisor to help you learn the advantages and disadvantages of mutual funds.

Advantages

Professional management

Mutual funds have experienced and professionally trained managers who will keep an eye on them at all times.

Liquidity

When we decide that we don’t want to invest in a mutual fund anymore, we can easily get out. We just have to instruct our financial advisor or broker to sell, and that’s it. After a few days, we’ll get our funds back. Thus, it’s obvious that mutual funds are much easier to liquidate, unlike individual stocks.

Diversification

One of the most important things about investing is that we should always pay attention to diversification. Luckily, that’s easy with mutual funds. We only need to make one investment, and instantly, we’ll become shareholders of stocks from a variety of corporations. Moreover, mutual funds deal with all sorts of securities, including cash, commodities stocks, and bonds. Thus, even if one stock plummets, there are others we can rely on.

The perfect investment

What’s great about mutual funds is that we can easily find just the perfect investment for ourselves. If we do our research well, we can find a mutual fund that will match both our investment horizon and our risk tolerance.

Disadvantages

High fees

Some studies have shown that higher fees can indicate a lower performance. Thus, mutual funds can also be a gamble as well, as their fees get paid first. Moreover, their fees are quite high, as mutual funds have to pay marketing expenses and salaries.

Multiple fees

If we decide to invest in mutual funds, we have to be aware of the fact that they’ll charge us for more than just the regular fees. If we want to redeem our money, we’ll have to pay a fee. Moreover, there’s also the operating expense, which is a percentage of the total operating cost of the fund. We’ll usually pay the operating fee on a yearly basis, which could significantly reduce our returns.

Wasting money

Investors can sometimes withdraw their mutual funds, which means that these funds need to have cash available at all times. However, we cannot collect interest on cash. Thus, it’s better just to keep the cash in our bank accounts. Otherwise, it’s just wasted.

The locked-in clause

Some mutual funds will allow us to go in and out whenever we want. However, there are those that lock us in for a decent amount of time — anywhere from five to seven years. So if we want to get out a bit earlier, we’ll have to pay a fee.

Should we buy individual stocks or invest in mutual funds?

The mid-1970s brought us mutual funds, and we also got the ETFs (exchange-traded funds) in the 1990s. Since then, we’ve had a chance to explore other investing methods that don’t require us to do much research at all. That is the main advantage of investing in these funds.

Mutual funds are also diverse by nature, so there’s less risk involved. Also, since they don’t require much research or any sort of effort really, they are a good option for the lazy investor. Nevertheless, that doesn’t mean that mutual funds are a sure bet.

Over 90% of mutual funds cannot conquer the S&P 500 index, which just tells us that they are an expensive way of lowering risk and diversifying. Moreover, only a couple of mutual funds have ever outperformed the market. Why? Mostly because of all the expenses.

Mutual funds have to advertise, and they also have to pay large accounting and legal fees. Furthermore, they have to send the investors statements each month, which can add up. So, in essence, because of these fees, we just cannot generate enough revenue to really say that mutual funds are worthy of our money. After all, these fees alone can reduce our returns by up to 2%.

Final thoughts

In the end, it’s up to us to decide whether mutual funds are the right choice. Of course, large fees don’t necessarily lead to large returns, no matter what the ads say. However, there are some valuable pros to mutual funds. If we don’t mind the risk and believe in the financial system, there’s no reason why we shouldn’t try investing in them. It is less risky than acquiring one stock, so even if the investment fails, we can go back from it.

Nevertheless, we have to be aware that mutual funds don’t guarantee big returns nor great performance. Thus, if we’re considering them, we have to take everything the managers say with a grain of salt and always be prepared to suffer a few loses before winning big.

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