Tips & Tricks

Advantages and Disadvantages of Investing in Mutual Funds

You may have heard that mutual funds are one of the things that you can invest in with a little amount of money. This is very true.

Mutual funds also give investors instant diversification, liquidity and professional money management. But just like any other investment, they have their downsides too.

It is very important to understand both the good and the bad of mutual funds before you go ahead to invest your money in them.

5 Advantages and The 3 Disadvantages of Mutual Funds

Advantages of Mutual Funds

1. Affordability

You start buying shares or units with a relatively small amount of money, for instance $500 for the initial purchase. There are some mutual funds that allow investors to purchase more units on a regular basis with smaller installments of about $50 per month.

2. Diversification

When you purchase just one mutual fund, you will hold securities from very many issuers. The diversification reduces the risk of losing your money because of problems in a particular industry or company.

If one stock or asset is not performing very well, there will be others to compensate for it. The potential for losses when you invest in the mutual funds is distributed conservatively.

3. Liquidity

You can buy and sell the units or shares in a mutual fund any day provided that the market is open. This gives you very easy and flexible access to your money.

4. Professional Management

When you invest in mutual funds, you do not need to have the nitty-gritties of how they work. They are managed by professionals that have a lot of experience in investing money and have the right skills, education as well as resources for researching diverse investment opportunities.

5. Flexibility

There are different types of funds that are managed by mutual fund companies, namely fixed income, money market, sector, balanced and global funds. You can switch between these funds as you please at a very little cost or no cost at all.

You are free to change your portfolio balance as and when your financial goals, market conditions or personal needs change.

Disadvantages of Mutual Funds

1. High Cost

One thing that you would realize about mutual funds when you start investing in them is that the cost associated with them in relation to the returns that they produce is very high.

Apart from being charged for the price of the fund that you will buy, there are other additional fees that you will be required to pay. The commission charges can be quite significant depending on the fund that you will buy.

2. Unpredictable

Buying a mutual is not a guaranteed ticket to richness because of their unpredictability. Even though expected returns will be quoted when you purchase the funds, it is almost impossible to find one that has a guaranteed return.

3. Locked in Clause

Mutual funds have two structures – there is one where you can go in and out any time and another that locks you in for a period of 5 to 7 years.

With the second one, you will be charged if you try to take your money out before the agreed time. It is a good idea to speak to a financial advisor in order to know which the better mutual fund structure to invest in is.

Bottom Line

The advantages that mutual funds carry can only be achieved through correct investment practices. Keep in mind that they are annual expenses which must be paid when you invest in these funds.

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