A mutual fund is a type of investment where there are a number of investors who invest money to a common pool. The money is then used to purchase securities. Every investor has shares of the fund which can be sold whenever they want. The investments of the fund are supervised by professionals in the field. Mutual funds have become an important element in retirement planning. It is an ideal way of saving or making money and is better than an individual investment. It has many advantages and disadvantages, some of which are given below.
Advantages of Mutual Funds
Spreading the investment
Mutual funds help you spread your investment in different places. By doing so, it can be assured that you will not be at a complete loss at any point of time. Not all the stocks will come down at the same time. Even if some of them are down, you can still hold on to others.
More options available
For every stage of your life, mutual funds have a plan ready. Your tastes vary as you enter a different phase of your life. These funds cater to your needs in a very profitable way. You can discuss your lifestyle with a financial advisor who can guide you to choose the best option.
While investing in mutual funds, you can be sure that your money is in safe hands. Qualified professionals backed by a research team monitor the funds. Their job is to analyze the performances of the companies and choose better investments. They help you get a higher return which is your ultimate goal.
These funds in the mutual funds are more liquid than others. Anytime you wish, you can redeem your investment in whole or part in the current value of the shares. This whole business is very efficient and quick that your money reaches you as and when you require it.
Scope of reinvestment
There are dividends and other incomes associated with the funds with which you can buy additional shares in the fund. This is a good way of reinvestment which is beneficial because it ensures better growth of the investment.
Disadvantages of Mutual Funds
The funds are accompanied by two types of fees. One is the shareholders fee like redemption fee. This fee is paid by the shareholders when they buy or sell the funds. The second type is annual fund operating fees. This must be paid by the investors of the fund annually. Usually ranging from 1-3%, this fee has to be paid whether the fund is profitable or not.
Marketing is the key to any business these days. Same is the case with mutual funds. Attractive advertisements mislead the investors into wrong funds. The funds may be given wrong names to trick the investors. For example, a fund that is small cap may be advertised as a growth fund.
Difficult to compare
It is almost impossible to compare the mutual funds. The investors cannot compare the funds’ earnings, sales growth etc. The ads and ratings only have a record of the past performance of the fund. With the data about the past you cannot predict its future.
Even though mutual funds are backed by the government, they are not insured. There are insurances for losses at banks and other unions, but not for mutual funds. This negates all the advantages it has. It might be difficult to recover from losses at mutual funds, especially if you have invested all your life savings in it.
No say in the funds
All the decisions regarding the funds are usually taken by the managers. When it comes to buying or selling an asset you may not completely agree with his decisions. So, you have a lesser control over your own money.