Advantages And Disadvantages Of Mutual Funds

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Investors consider mutual funds as an essential part of an investment. For those investors who have little knowledge, time and money mutual funds will offer various benefits.

But it also has some disadvantages. Mentioned below are some advantages and disadvantages to consider before you invest in mutual funds:

Advantages:

Liquidity:

Mutual fund allows you to invest in as well as move out very easily. Generally you will be able to sell off those already bought mutual funds with ease and within a short duration.

There would not be too much difference between the sale cost as well as most current value in the market. But you should look out and find out if any fees are related to selling such as fees for the back-end load.

Moreover unlike the stocks along with exchange traded funds, that do not have any specific trading time during the market hours, a mutual fund’s net asset value will be calculated and then it will transact only one time each day.

Diversification:

Diversification of asset is the main rule of investment for large as well as small investor. It usually involves mixing various kinds of investments that stays in a portfolio as well as are used for risk management.

As such, to minimize the impact, the performance of your security on the complete portfolio, you may select to buy some stocks in the retail sector and offset them with other stocks available in the industrial sector.

To make your portfolio truly diversified, you need to buy stocks with various capitalizations from various industries as well as bonds that come with different maturities from various issuers. For individual investors, it looks very expensive.

Affordability:

Start buying units and shares with a very small amount such as $500 can be spent on your initial purchase. There are some mutual funds that will let you buy more shares regularly with very little instalments like $50 each month.

You can also select from the zero-land ones that are with less costly ratios. You can research well and find out the various mutual funds’ expense ratio and then select that one suiting your budget as well as financial goals.

To manage your fund, expense ratio will be the fee. It is a beneficial tool to have access to the performance of a mutual fund.

Disadvantages:

Charges:

When you will redeem the money, mutual funds will be charging fees from you. Fees are also charged as operating expense by mutual funds. Operating fees is basically a percentage of whatever costs are necessary to run your fund.

Suppose you have invested $10,000 with operating fees that will cost you 2%. So you have to pay $200 each year for the operating charges. A very high charge is also associated with mutual funds and it is related to their produced returns.

It is mainly because investors will be charged for the fund’s price along with some extra fees. Depending on the type of mutual fund, commission charges are also significant. You also require to pay some fee to your fund manager.

Management Fees:

Salaries along with marketing expenses are paid by different mutual fund companies. They are paid first always even before any investor gets paid. As an investor you need to carefully monitor these management fees as they have a tendency of quickly and completely affect your profits with the passage of time.

But do not have this idea that higher management fees will correlate to higher returns along with better performance. It has been found out from some studies that higher fees usually correlate to very low performance. So the total fund management fees are one of the main things to consider before you select a mutual fund.

You should also be aware of the fact that the fees that are charged actually depend on the type of the purchased mutual fund. So if a mutual fund is risky and very aggressive, then the management fee will be higher. The investor will need to pay off taxes, fees for transactions and other costs for maintaining the mutual fund.

Lock-in Period:

There exist two types of structures for mutual fund investments. One of them will allow in as well as out movement any time whereas the other will be locked in for at least 5 to 7 years. Mutual funds have lock-in periods with long term. So if you wish to take out your money before time with this mutual fund, you will be charged.

Thus exiting these type of mutual funds before they mature will be a very expensive affair. A certain part of this fund is kept in cash always in order to pay out any investor who wishes to exit this fund. But this portion that will be kept in cash will never earn interest for any investor. Always ask a financial advisor what type of mutual fund you will be investing in.

So it is clear that performance is never guaranteed from a mutual fund. So utilize past performance and make wise decisions.