Advantages and Disadvantages

Professional Management:

Mutual funds give a small investor a chance to invest a low amount in a professional manner. It is not feasible for small investments to be managed professionally, on an individual level, because of low capital and low returns for the managing company. Once you decide on a mutual fund to take care of your investment, all these charges can be avoided. You needn't be an expert in trading or market analysis for making an investment. A professional fund manager make decisions on behalf of every small investor who put in money through the firm, thus saving valuable time and effort.

Diversification:

A good investment practice involves diversifying the amount in different stocks or bonds. It provides the option to hold a number of securities and reduce the risk of losing money, which is not subject to the volatility of a single stock.

Lower transaction costs:

If you want to make an individual investment, it would involve a large transaction cost. On the other hand, a mutual fund involves a large amount of capital to be traded. Therefore, it bears a small transaction cost which eventually translates into a small transaction fee to be paid by an investor.

Liquidity:

Mutual funds allow the liquefying of assets within a short period. Close-end funds may trade below or above the Net Asset Values, in which case, the investment recovered depends on the NAV of the security invested into. But the entire investment can be regained in two business days for an open-ended mutual fund.

Disadvantages of Mutual Funds

Following are some of the disadvantages of mutual funds.

High costs and risks

Mutual funds require a detailed study of the investment options as the fee charged by the management firm can be quite high. Mutual funds are subjected to market risks or asset risks. If the investment is not sufficiently diversified, it may involve huge losses.

Tax issues:

Although, the returns on investments are quite high, a mutual fund cannot guarantee lower tax bills. The tax amounts are usually high, especially in case of short-term gains. Moreover, it is the fund manager who handles these issues and you cannot dictate terms on the amount of tax to be paid.

Investor issues and company profile:

In case of repeated investments by new entrants, the value of shares owned by current or existing investor decreases significantly. Also, a mutual fund requires a deep and long term analysis of the amount of investment and its potential investment areas. If the company fund managers are changing regularly, it may adversely affect the returns on your investment. A mutual fund organization is, however, characterized by frequent changes in jobs and positions.

Thus, before deciding on a mutual fund investment, both the advantages and disadvantages have to be considered. If the advantages exceed the disadvantages, only then is it advisable to go through with the investment. Still, it is always advisable to do a bit of research yourself, before investing.

Related Resources:

5 Main Disadvantages of Mutual Funds

Top 10 Reasons to Buy a Mutual Fund

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