In recent years, more and more consumers have turned to mutual funds in order to save for retirement, or to help them reach other financial goals. As with any investment, however, there are risks associated with mutual funds, so it is important to consider both the advantages and disadvantages of them prior to investing one’s hard earned money.
Advantages of Mutual Funds
• Managed by Professionals – One of the key advantages to mutual funds is that they are run by professional money managers whose job it is to actively research, select and monitor every security that the fund purchases in order to maximize returns for the fund’s investors.
• Diversified – As the old saying goes, “Don’t put all of your eggs in one basket. ” Nowhere is this truer than when building an investment portfolio. These funds are popular because they allow investors to spread their risk over many different companies and industries, which minimize the fallout when any one particular company or industry suffers losses.
• Affordable – Many mutual funds are affordable even for smaller investors thanks to low initial purchases or subsequent monthly purchases.
• Liquid – Anyone that invests in these funds can quickly redeem their shares whenever they want, unlike other investments where their investment cannot be touched for 5 years, 10 years or more.
Disadvantages of Mutual Funds
• Costs Even When Returns are Negative – One distinct disadvantage to these funds is that investors must still pay annual fees, sales charges and other related fees regardless of how well or how poorly the fund is performing. In worst case scenarios, investors may find that they are paying fees to keep money in funds that are losing money.
• Little or No Control – With individual stocks and bonds, the investor is in control of what they purchase. But with funds, this is rarely the case. The fund managers are responsible for what securities make up the fund’s portfolio, and when they are bought or sold, not the investor.
• Uncertain Prices – Investors can easily obtain real-time pricing information on individual stocks, but it is a different story with mutual funds. Legally, they must calculate their NAV (net asset value) once per day, but this may not occur until after the major exchanges in the U. S. have closed for the day. In other words, when a fund investor decides to redeem or purchase shares, the NAV of those shares may not be calculated until hours after the order has been placed.