Home List of Pros and Cons 9 Pros and Cons of Investing in Mutual Funds

9 Pros and Cons of Investing in Mutual Funds

Investing can be a good source of wealth especially when it is handled properly. Although it can be lucrative, investing also has an inherent risk. There are many types of investment portfolios you can place your fund. Some people would tell you to invest in stocks. Others would suggest investing in bonds or long-term deposits.

On the other hand, investing in mutual funds is still popular not only for novice investors but also for expert portfolio managers. There are many reasons why you should choose mutual funds. But before you make any decision, there are also many things you should consider in order to determine your success.

What Is Mutual Fund?

Mutual fund is a type of investment in which all funds from different investors are pooled and spread across various portfolios such as stocks. The reason for this is to reduce the risk by spreading it. If there’s a saying that you should not put all your eggs in one basket, such principle is the concept behind mutual fund investing.

Types of Mutual Funds

1. Open-End Mutual Fund
This type of mutual fund works like a stock broker. It accepts funds and reinvest them in various stock portfolios. The profit of investors is determined by how mutual fund managers handle the funds. You can also withdraw your money the same way you can withdraw your money from a stockbroker.

2. Closed-End Mutual Fund
Closed-end mutual funds, on the other hand, are like stocks which are listed and traded in stock exchange. They have fixed rate of dividends and are valued according to current market price. If you want to invest in closed-end mutual funds, you can analyze their charts the way you analyze the price action of a particular stock. Closed-end mutual funds are the same mutual fund companies you can invest your money in, but such companies as public corporations are also listed as other companies being traded in stock exchange.

Pros of Investing in Mutual Funds

1. Diversified Portfolios
Your money in mutual fund is invested not only in one single portfolio investment. It is invested and distributed among hundreds of portfolios along with the funds of other investors. In this way, your money is safe even if one of the hundreds of portfolios is losing because the rest the portfolios may offset the loss. If the overall market is good, mutual funds are more likely profitable.

2. Managed Account
Mutual funds are managed by expert traders and analysts who work on behalf of the company and of the investors. If you don’t have enough time or knowledge in investing in mutual funds, your money is safely managed by those who spend full time monitoring the market.

3. Liquid
Mutual fund is liquid. You can get in and out of the market any day. Although it is not as liquid as stocks in which buying and selling can take place any time of the day, mutual funds can be settled at the closing of the market.

4. Accumulation
In trading stocks, your fund will not accumulate unless you purchase additional shares, or the annual shareholders meeting of the company you bought declares that the dividends be reinvested. In mutual fund, you have the option to get your dividend or to reinvest it. If you choose to reinvest it, your fund will accumulate, and so will your income.

5. Wide Range of Investment Portfolios
Mutual funds are not only limited to investing in stocks. They also invest in several other types of investments such as bonds, currency, commodities, real estate, and bank notes. This means mutual funds can thrive in other markets if one market slows down.

6. Low Minimum Required Amount of Investment
Investing in mutual fund is not only for wealthy people. You can start investing in mutual funds for as low as $50.

Cons of Investing in Mutual Funds

1. Less Control
Although your money is invested in many different types of portfolios, you have less control of it. It is the money managers who decide where and when to trade the fund based on their market study.

2. Fees
Mutual funds charge an annual fee of around 1.5% or even higher regardless of the fund’s performance. Moreover, they charge a “load” or a certain amount per sales transaction.

3. Low Return
Mutual funds are safe, but the return is not as high as other forms of investment. In investing, the higher the return, the higher the risk. Mutual funds are low risk investment.

Conclusion

Many people have already made fortune out of investing, but there have also been many people who lost their fortune in the same manner. Your success will depend on which type of investment you would like to put your money in. Mutual funds may not promise the same fortune others earned, but it can guaranty you would not lose as much as others lost in other forms of investments. Although every investment has an inherent risk, mutual funds can be one of the safest investments you can try.

One Final Important Note

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