A mutual fund basically pools investors money together which is then professionally managed and asserted. They can invest into stocks, bonds or any profitable asset , and can benefit on a large scale from the interest that the entire pool will generate. The basic security it presents is called a holding, many of which combine to form one mutual fund. A mutual fund investor owns shares of the mutual fund he/she invests in. Since these funds hold diverse kinds of investments, they are also known as diversified investments. There have been countless books, articles, and pretexts for mutual funds for dummies. In this article we would go over some of the advantages and disadvantages of Mutual Funds Investment that we have gathered from seasoned investors.
Proper knowledge about mutual funds investment is extremely essential and investing in them governs how your saving multiplies in the long run. One must aptly ponder over the pros and cons of investing in a mutual fund on the basis of how their assets are diversified. Given below are a few advantages and disadvantages of mutual funds investment that one might give a look-see to decide if they are making the right decision in investing.
Also Read: Demystifying Initial Public Offering (IPO)
Advantages of mutual funds investment
- Diversification of investments
One of the main features of mutual funds is its diverse nature and range of investments. With just one investment, one can own shares of multiple securtites, bonds or cash. If the value of the stock goes down, the investor can benefit from other sources of funds. This kind of diversification can be carried out instantly once the investment is made, which is why people prefer mutual funds over other types, as the potential losses are spread out discreetly.
One can very easily get out of a mutual fund whenever they need. They just need to consult with their financial advisor or broker and instruct them to do so on their part. Once gotten out, the invested funds take at the most a day to return to their bank accounts in the form they have invested. Individual stocks take slightly more time to be liquefied.
- Money management
Mutual funds are run and organized by investment managers who are highly experienced and have a constant touch in managing such funds and watching them. Companies that solely focus on managing mutual funds to invest in are more resourceful and experienced than individual retail investors.
Disadvantages of mutual funds investment
- Mutual funds charges
When one redeems money or liquidates mutual funds holding, it charges them operating expense fees, which basically is never accounted for. It is justified for running the fund, which comes to around 2% of the total value of their shares. In addition, the investor will also be asked to pay transaction charges . The fees that are charged will depend on the type of the mutual fund purchased.
- Low returns
Though mutual funds operate on equities, the returns generated are lower when compared with investing directly on stock market. Most of the profits are eaten up due to diversification and fund management costs. However, given the less riskier nature of mutual funds, the lower profits are justified. This is a typical example of risk reward ratio.
Investing in mutual funds is surely a slow and a thought-over decision, but then one must not keep on waiting until they know everything about the market, which is admittedly not possible. Only practice makes an investor perfect over time in such fields rather than the perfect impossible knowledge people would want to have in case of mutual funds. We always recommend to have a portion of your capital be invested in mutual funds so that your funds are protected and are in safe hands.