What You Should Know about Advantages & Disadvantages Investing in Mutual Funds

Advantages of Mutual Funds

1. Affordability

It doesn't cost much to invest in a mutual fund. Though there are an expensive funds, but most of you can afford to buy into a fund.

2. Diversification

Mutual fund investors enjoy broader ranger of stocks than they could when investing on their own. By using their own money, an individual investor could only buy a small number of shares in a few companies.

However, when he invest in mutual funds he will get instant diversification because his money is pooled with those of other investors and create a bigger purchasing power.

"Don't put all your eggs in one basket."

3. Liquidity

It is easier to buy and sell the units in the mutual fund compared to investing directly in stocks. In stock market, any security will depends highly with the volume, or supply and demand of the stocks at that particular time.

4. Professional Management

Mutual funds are manages by a team of professionals who made the decision of investing objectively, informed and organized. The investment will be made after an extensive research made by the professional analysts and they could continuously monitor the portfolio.

5. Reduced stress

Private investor does not have to worry anymore on the issue of monitoring his stocks daily. The fund management has overtaken the job to monitor the portfolio. You will get interim reports of the performance and any progress of the funds.

Disadvantages of Mutual Funds

1. Subject to Market risks

Mutual fund invests mostly in stocks and equities thus automatically the funds are exposed to any market volatility and movement. Diversification will help reduce the risk but it will not eliminate entire risks. The prices of units go up and down, dividends may or may not be paid and you will get realise gain or loss when you sell your units.

2. Not for short term investment

Mutual funds are made for the medium to long term investment. The gains made from the funds are not realised immediately. The movement of mutual funds generally slower than the stock market movement.

3. No control

As an investor, you should make sure you could control your investment decision, however it can't happen in mutual funds. You can't tell the fund manager what to buy or what to sell but the manager will consult his own counsel. You have the least control by investing in mutual funds. You could only ensure that the fund manager follow the investment objectives and the policies that has been published in the funds prospectus.

4. Cost

You have to bear at least 3 types of cost when you invest in mutual funds. The costs are much higher than investing in stock market. You are actually in loss positions once you buy mutual funds.

You have to be informed with these charges:

    a. Initial service charge

    b. Repurchase charge

    c. Swithching charge

    d. Management charge

In other words, you have to know before hand what is the possible charges in the mutual funds. Though, a great fund manager may charge higher but it doesn't necessarily the case.