Mutual funds have enjoyed a distinct love from investors in the US. Currently, it is the most popular investment channel, mainly due to the safety and returns it provides. It’s not that Mutual Funds are all rosy. They do have some negatives specific to their case, which cannot be overlooked.
Thus, you must know about the pros and cons of dealing with mutual funds before you put your hard-earned money into it.
Improved portfolio management
You will need help from a professional portfolio manager for trading stocks and bonds. In exchange, he/she will demand a management fee to keep the records updated. Thus, you get expert guidance to improve the investment portfolio on a relatively small price.
Automatic reinvestment
Mutual funds are popular for reinvesting acquired dividends to buy extra shares. Subsequently, the interest income is used to magnify investment and gain more profit.
Reduced risks
Generally, mutual funds invest the pool of money in almost fifty to two hundred securities. The diversification dramatically marginalizes the risk of individual investors. There are many stock index mutual funds that hold more than one thousand stock roles.
Ease of use
Mutual funds are not scary to understand at all. They do not demand huge investment, nor are they traded every second. You can start with anything more than $2,500 with a keen look at their daily closing NAV, net asset value.
Thus, the risks and complications of price fluctuations are scrapped. Plus, there are no arbitrage events as in case of day trading assets.
Disadvantages
Sales charges
In case you still don’t know about mutual fund sales charges and the expense ratio, then it’s time to brush up your knowledge. Mutual funds that charge more than 1.20% expense ratio are ranked on the higher cost pedestal. Also, be sure about the sales charges and 12b-1 advertising fees too. You must research for the mutual fund that charges the least management fees.
Unlawful practices
Managers are known to abuse their powers by window dressing, turnover, and churning. They are more likely to indulge in excessive replacement, unwanted trading and sale of losers before the quarter-end to maintain the books.
Tax compulsions
Investors have to pay taxes at tax filing irrespective of the size of their capital gains. They are obliged to pay the government on gains, turnover, redemptions, and losses in securities for the entire year.
Unattractive trade practices
We advise you not to indulge in mutual fund trade before the cut-off time on the day’s NAV. In this case, you will be getting the same price NAV for selling or buying the mutual fund. On the other hand, people who are interested in a faster trading pace can never be impressed by mutual funds.
Conclusion
Mutual funds are great in case you are starting your investment career. They provide adequate cushion for everyone who is not sure about taking bigger risks. You should continue investing in them with indulgence in other platforms like stocks. With time, you will create a more diversified and beneficial investment portfolio. Don’t hesitate; buy your favourite mutual fund now.
