Mutual Fund Advantages and Disadvantages

Investing in a mutual fund is a very common tactic. This type of investment is offered by many different financial institutions across the world. Here are some of the advantages and disadvantages that you will be subject to when investing in a mutual fund.

Advantages

One of the main advantages of investing in a mutual fund is that you will receive professional money management. A mutual fund is run by a fund manager. This fund manager or group of managers knows quite a bit about investing and the financial markets. Fund managers have a great deal of experience with investing, and they will be in charge of making the individual investment decisions for you. Many people prefer having someone with experience take care of their money.

Another big advantage of putting money into a mutual fund is the diversification it provides. Mutual funds pool together large amounts of money from investors and use that money to purchase securities. They will typically purchase thousands of different securities for the fund. This provides a very diversified form of investment for the shareholders. As an individual, you would not be able to achieve this level of diversification on your own. Some say that it takes at least 100 different stocks for a portfolio to become really diversified. Not many individuals have the necessary funds to purchase that many stocks in significant quantities.

Investing in a mutual fund will also provide you with economies of scale as an investor. Since you are investing as a very large group, the mutual fund will be able to get great deals on the prices of securities. This savings in transaction costs will add to the annual return that you receive as an investor.

Disadvantages

When you invest in a mutual fund, you will have to be aware that there are some costs involved. Many people believe that these costs effectively cancel out the advantages that you get by investing in a mutual fund. Some mutual funds will have a front-end load or a sales commission that must be paid when you purchase shares. Other funds have a back-end load that is charged whenever you sell your shares. In addition to these fees, you will also pay a yearly expense ratio for the management of the fund. When choosing a mutual fund, make sure that you are aware of how much the fund's expense ratio is.

Another disadvantage of putting your money into a mutual fund is that there are liquidity issues to be concerned about. With a mutual fund, you will not be able to buy or sell shares until the end of the trading day. When the market closes at 4:00 ET, all of the orders for the day will be filled at the same time. If anything happens during the day that could negatively impact your investment, you will not be able to get out until everyone else is given the same opportunity. In addition to this, you will not even know the price of the shares until you have already placed your order and the prices are calculated at the end of the day.

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