Top 3 Advantages and Disadvantages of Investing in Mutual Funds

by on January 28, 2013

In these somewhat uncertain financial times, many investors are touting mutual funds as the best way to invest in the market. Sometimes, they even make investing this way sound like a sure thing.

However, you don’t have to be a savvy investor to realize that every investment isn’t for every person. Before you put any money into a mutual fund, be sure that it is the right investment for you. You’re the only one who can make this decision, and to do so you need some good information about how your financial life could be changed by investing this way.

While there are many technicalities when it comes to any sort of investment, below you’ll find the major advantages and disadvantages to mutual fund investing. If you keep reading and this style of investing sounds like it might work for you, I encourage you to continue digging deeper at Gajizmo.com to learn about different types of investing strategies and how to manage your personal finances, including real estate, credit and debt, insurance, and career advice.

Advantages of Mutual Funds

Diversification. Having a diverse portfolio of investments means that you have a good balance of companies, whether the differentiation is due to size, industry, country, or business model. Diversifying your portfolio means that one of your investments can lose money and you won’t experience a significant loss in your overall portfolio.

If you’re buying individuals stocks, bonds, and other types of investments, it can be difficult to achieve the level of diversification that you need and want. After all, most of us have jobs outside of figuring out our investments, and we don’t want to spend all our leisure time investigating and then following up on the investments we’ve chosen.

This is where mutual funds come in. When you buy a mutual fund, the diversification is done for you. Someone has done their best to choose a diverse portfolio of investments, and when you invest in the fund, you get the benefit of their choices. It’s still up to you to choose the fund or funds where you’ll put your money, but you won’t have to evaluate each individual investment itself.

Professional Management. Each mutual fund is managed by a financial professional. This person makes the choices about when to buy and sell the different investments, or securities, so that you don’t have to try to time the market by yourself. Since the fund manager is a professional, they have experience and knowledge about what the market might do, and therefore they’re likely to time these things better than you are.

In addition, professional fund managers have more resources than you do. This means that they have the time, personnel, resource, investment research, and money to investigate each individual security in more depth than you might be able to. Since good research is a huge part of successful investing, the fund manager is likely to make sound investment choices.

Ease of Investment. Investing in mutual funds not only relieves you of the burden of researching and then staying on top of each investment you make, but it’s also easier than many of these investments. Usually, you can get information, buy and/or sell shares, and get money out of your fund in many different ways, including by mail, phone, or online.

In addition, mutual funds are fairly liquid investments. This means that it’s easy to get your money out of the fund if you find that you need it for something else, even if you’re in an emergency and you need your money quickly. Sometimes it can take more time to get your money out of other types of investments, which is part of the reason why so many people like mutual funds.

Disadvantages of Fund Investing

Costs. In exchange for having a professional manage your fund, you will pay fees for investing in a mutual fund. These include commissions, operating costs, redemption fees, and other fees mandated by the government. All of these costs will be spread among the investors in each fund, and you can expect to pay a certain percentage of your gains each year in these fees.

Some mutual funds have very high fees, while others are much lower. All fees should be disclosed in the information you get about the fund, though it can be difficult to understand the language. If you’re not sure how much you’ll end up paying in fees for a particular fund, it can be helpful to get the aid of a financial professional or a lawyer to decipher exactly what your investment will cost you.

Risk. As with any investment, mutual funds are not without risk. If the overall market crashes, or even the segment that your fund specializes in, you could lose much of your money. Putting money into a mutual fund is never a sure thing, even though some people tout them as such.

Having a truly diverse fund will lower your risk significantly. It’s up to you do to your research and determine whether a particular fund’s risk level is something you’re comfortable taking on. You can find independent assessments of fund risk online, though it’s always good to make sure that any review or opinion you read is written by a financial professional or another expert. Otherwise, you may find yourself getting incorrect information.

Difficult to Evaluate Funds. Except in a few particular circumstances, mutual funds don’t offer potential investors the same amount of information about fund growth, etc., that many individual stocks offer. Thus, it can be difficult to determine whether a particular fund is exactly what you’re looking for.

Similarly, mutual fund managers can change regularly, which means that the existing information on a fund, particularly anything on the investment strategy governing it, won’t necessarily be true in the future. While you can usually determine who the current fund manager is with a little more research, this is an extra step that you’ll want to perform before you invest.

Final Word

In the end, where you invest your money is your decision. You’re the one who knows your financial situation the best, and you’re the only one who can determine how much risk you’re comfortable with, how many fees you’d like to pay, etc. Thus, be sure to do your research. If you choose to invest in mutual funds, happy investing!

{ 4 comments… read them below or add one }

Buy & Hold Blog February 6, 2013 at 4:50 pm

I don’t know if mutual funds are more riskier than individual stock holdings. If you buy low cost, high quality mutual funds from companies like Vanguard, Fidelity etc. and do a good research, your risk will go down. Risk is never eliminated from investing in the stock market, but I would contend that investing in individual stocks is probably more risky for everyday common folks who don’t have time or skills to do serious research.
Buy & Hold Blog recently posted..Actively Manged Funds vs. Index FundsMy Profile

Reply

Cat February 8, 2013 at 1:44 pm

Investing is something I Know I need to do, but the research is so daunting. So I played around buy a few (not many at all really) stocks of a couple companies that I liked, shopped at, etc. They didn’t do so hot.

Granted they still have some value but it wouldn’t be worth it to turn around and sell them now.

The only reason that I haven’t tried a mutual fund is that you need a minimum investment of $1000 for a lot of them, and I only have a little here and there to throw into investing for the time being.

It’ll be interesting as my research goes on, and thanks for the post!
Cat recently posted..BloggingMy Profile

Reply

Lorillia February 15, 2013 at 11:52 pm

Though mutual fund rises slowly I prefer to invest in this type of categories.

@ I do not understand why well profit companies do not offer mutual funds?

Reply

DW September 4, 2013 at 7:35 pm

If there’s anything I love about mutual funds, its that they are so simple. You can invest in any one of a few low cost index funds and just sit back. As John Bogle points out, these costs are the lowest, most tax efficient, and always out perform their counterparts in the long run. So even though I like the residual income I get from dividend stocks and the excitement of picking individual ones, I still prefer to use mutual funds as a place to park most of my funds for future withdrawals.
DW recently posted..What Are Some Good Investments for Generating Passive Income?My Profile

Reply

Leave a Comment

CommentLuv badge

This blog uses premium CommentLuv which allows you to put your keywords with your name if you have had 3 approved comments. Use your real name and then @ your keywords (maximum of 3)

Previous post:

Next post: