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Advantages And Disadvantages Of Mutual Funds

By Edited Nov 13, 2013 0 0

As you investigate various options for investing, you have probably run across the investment option of mutual funds.  Just like any investment option, there are advantages and disadvantages to mutual funds.

Advantages to Mutual Funds

Professional Management: Typically, a professional investment manager is in charge of your investment portfolio.  This person has a lot more time to look into all of the investment options, and the experience to know which ones will earn you the most money. For this professional service, you pay a small fee. 

For many people who don’t have the time to manage their investments, this is well worth the cost.  This person makes sure that at all times the investment portfolio has the correct ratio of investments that will make you the most money.

Making the Money you Earn Make you More Money:  As you earn money through interest or from dividends, you can then take that money and buy more shares of the mutual fund.  In this way, the money that you earn helps to earn you even more money.

Diversification:  Instead of putting $5,000 of your money all in one company’s stock, a mutual fund allows you to spread your money around so that you are actually investing in hundreds or even thousands of different companies.  This gives you more of a safe investment position and reduces your overall investment risk.  For many investors, this safety is quite important to them.

Ease of investing:  Unlike some other more complicated investing options, mutual funds are easily available to everyone.  Many allow you to purchase shares in the fund for a relatively small amount compared to other ways you could invest your money. 

This means that if you are just starting out building your investments or your retirement portfolio, this could be a good option for you.  In addition, mutual funds are not allowed to be traded multiple times during the day. This means that the price won’t be going up and down throughout a single day, and the price won’t be so heavily impacted by market fluctuations.

Disadvantages to Mutual Funds

Fees: Some mutual funds charge high fees and charges to their customers, and this can vary from fund to fund.  Make sure that you do some comparison shopping. Poor management.  In order to show short-term gains, some mutual fund managers may buy and sell some of the stocks before it comes time to do quarterly reporting in order to show that the fund did better than it actually did.  Since you are relying on professional management to take care of this for you, this can be extra distressing.  

Timing:  Since mutual funds are designed to reduce your risk through diversification in a large number of stocks, this isn’t necessarily the best way to make a lot of money through short term investing.  Quick day trading type strategies aren’t going to work with mutual funds.  If you are looking at the near future, perhaps mutual funds aren’t your best option.

Like all investment options, there are both disadvantages and advantages for investing in mutual funds, and you need to determine if one is the best choice for you.


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