Advantages
Built-In Diversification
Investing in a diversified portfolio can be very expensive. The nice thing about mutual funds is that they allow anyone to hold a diversified portfolio. The reason why investors invest in a diversified portfolio is because it increases the expected returns while minimizing the risk. Therefore, many see mutual funds as a cost effective way to achieve this.
Liquidity
Another nice advantage to mutual funds is that the assets are liquid. In financial jargon, liquidity basically refers to converting your assets to cash with relative ease. Mutual funds are considered liquid assets since there is high demand for many of the funds in the marketplace. Since this is the case, an investor can convert the asset to cash by quickly selling it to another investor.
Professional Management
Mutual funds do not require a great deal of time or knowledge from the investor because they are managed by professional fund managers. This can be a big help to an inexperienced investor who is looking to maximize their financial goals.
Ease of Comparison
Mutual funds are also convenient because they are easy to compare. This is because many mutual fund dealers allow the investor to compare the funds based on metrics such as level of risk, return and price. Because the information is easily accessible, the investor is able to make wise decisions.
Disadvantages
Cost
One downside to mutual funds is that they have a high cost associated with them in relation to the returns they produce. This is because investors are not only charged for the price of the fund but they will often face additional fees. Depending on the fund, commission charges can be significant. You will also need to pay a fee that will go towards the fund manager.
Index Does Better
In some cases, the stock index may outperform the mutual fund. However, this is not always the case as it depends in large part on the mutual fund the investor has invested in, as well as the skill set of the fund manager. Therefore, it is a good idea to do your research before investing in a fund. If the historical data indicates that it consistently underperformed compared to an index, then it is not a wise investment.
Fees
The fees that are charged will depend on the type of mutual fund purchased. If a fund is riskier and more aggressive, the management fee will tend to be higher. In addition, the investor will also be required to pay taxes, transaction fees as well as other costs related to maintaining the fund.
Unpredictable
Although expected returns will be quoted, it is impossible to find a mutual fund with a guaranteed return. This is because all assets carry some degree of risk. However, some mutual funds will carry a higher level of risk than others depending on how well it is diversified.
