What are the advantages and disadvantages of mutual funds?

Investing, Mutual Funds
Answers
Sort By:
Most Helpful
1 week ago
100% of people found this answer helpful

One advantage that a mutual fund has over a particular stock is definitely diversification. In the stock investing world, company stocks are sold individually. This means that if you want to keep yourself diversified across several different industries or sectors, you will have to be responsible for managing an investment portfolio (keeping track of which stocks to keep and which ones to let go of). Unless you have a very specific idea of the types of stocks you are interested in buying, assembling your own stock portfolio can be a very time-consuming task and I have found that the more some people have to keep track of, the more difficult and stressful it becomes.

With a mutual fund, you're diversified by owning a security that has a piece of several different companies that can sometimes range from several different sectors (depending on which type of mutual fund you buy). In this scenario, the appropriate investment choices will be made by the mutual fund's manager, so your job becomes less of managing the portfolio but rather managing the managers, so to speak, by selecting which mutual funds to own.

The disadvantage to a mutual fund in this very same scenario could actually be the money manager. Because mutual funds are groupings of securities or investments, they tend to have a lot of moving parts. Those moving parts can sometimes come with very high fees. It can be tough to track exactly which fees are being charged, let alone exactly how much is coming out of your account based on standard fees like; 12b1 fees, portfolio marketing fees, trading fees and portfolio turnover costs. The unfortunate thing is that the fund expenses are usually just the tip of the iceberg when it comes to mutual fund fees. There are also money management fees on top of your fund expenses as well and can be charged in a variety of ways from an upfront sales charge (or load), to an annual commission based charge as well. Some of these fees are changed by the fund manager and some can also be charged as commissions which are paid to your investment broker (if you buy the funds from one).

For more detailed description of the costs associated with mutual funds, I would check out this great article here on Investopedia: http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp.

My recommendation for an investor looking to decide whether they should be buying mutual funds or stocks would be to think about your financial situation and how you would feel if you had to pay someone to manage your money. For those that would take more of a do-it-yourself type path and feel comfortable managing their own investments, a do-it-yourself stock portfolio may be the right choice for you. For those that would rather manage the managers, not have to make day-to-day investment decisions and trust in more of a passive investment strategy, then mutual funds may be a great choice for you. It may be worth spending a little bit of extra money so you can get back to doing the things that are really important to you if you want to invest but would like to keep more of a hands-off approach with your money on a day-to-day basis.

last month
January 2010
last month
last month