A mutual fund pools together the money of people (investors), and then its manager will invest that money on behalf of those people (investors) in stocks, bonds, or other securities. Buying into a mutual fund will allow you to become a part of a group of investors that's investing on a much larger scale than you could as an individual investor. For example, a mutual fund can take in millions of dollars and buy up stock in Apple and Google; which would make each investor, including you, an investor in those companies. However, as an individual investor you would need to have millions of dollars at your disposal in order to buy the same kind and amount of stocks. Also if you are new to investing and lack the financial know-how to manage your own investment portfolio, mutual funds are professionally managed by a registered investment advisor. There are also different types and styles of mutual funds, such as money market funds, bond funds, stock funds, hybrid funds, etc. Each one of these mutual funds has different risks and rewards. Which is why I encourage you to thoroughly research each one of them before making a decision on which one is best for you. Below is a list of the advantages and disadvantages of investing in a mutual fund. Hopefully this list will assist you in making a decision on whether or not investing in Mutual funds is a right for you.
Advantages
- Diversification: using mutual funds can help an investor diversify their portfolio with a small investment. Diversification also help to reduce risk.
- Mutual funds are managed and supervised by investment professionals
- With most mutual funds buying and selling shares and obtaining information can be done conveniently by telephone, by mail, or online
- Mutual fund shares can be bought and sold easily during market hours
- Most mutual funds require a minimum initial investment of $2500 but some are as low as $1000
Disadvantages
-Risks and Costs: Changing market conditions can create fluctuations in the value of your mutual fund investment.
There are also fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual stocks, bonds, etc. directly.
As with any type of investment, there are drawbacks associated with mutual funds.
- The value of your mutual fund investment, unlike a bank deposit, could fall and be worth less than the principle initially invested. And, while a money market fund seeks a stable share price, its returns fluctuates, unlike a certificate of deposit (CD). In addition, mutual funds are not insured or guaranteed by an agency of the U.S. government. Bond funds, unlike purchasing a bond directly, will not re-pay the principle at a set point in time.
- Having a diversified portfolio can help to reduce your risk but it will not protect you from an overall decline in the market.
- Less control over your investments
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