What are the advantages and disadvantages of mutual funds?

Investing, Mutual Funds
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August 2016
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Advantages and disadvantages versus what?

Mutual funds versus individual stocks ..

A long list of advantages to mutual funds, mostly revolving around potential diversification by company size, geographical location, stock style (growth/value), dividend history etc. and spreading of risk, indexes performing much better historically than the average individual stock etc..

The only disadvantage I can think of to mutual funds over individual stocks is that mutual funds cost money to own in the form of annual fees (the expense ratio being the most obvious, but there are others).

 

Mutual funds vs exchange traded funds (ETFs) .. 

I personally see no advantages at all to mutual funds over index ETFs. Mutual fund apologists will talk about transaction fees every time you buy and sell ETFs, but that is barely an issue any more with platforms now providing large suites of transaction-free ETFs and the likes of Betterment not charging by transaction. So that "disadvantage" is invalid. Oh, they say, you pay a spread when you buy an ETF (the difference between the prices at which you can buy or sell). With spreads on major ETFs narrowing to almost nothing, cross that off the list of valid objections, too. I am not even going to bother to counter the ridiculous supposed issue with ETFs being tradeable during the day and therefore more tempting to trade. It's no harder to sell a mutual fund online than it is an ETF. 

Index ETFs crush (mostly actively managed) mutual funds when it comes to cost, average performance, tax efficiency, transparency and structure.

 

So: Individual Stocks < Mutual Funds < ETFs

 

A little bold prediction: ETFs will completely replace mutual funds within 10 years. The mutual fund as a product is hurtling towards its total demise. It's always a good idea to be on the right side of history. 

August 2016
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