Pros and Con of Mutual Funds

Mutual funds are an open-end professionally managed investment fund that pools money from many investors to purchase securities. Investors may be retail or institutional. The securities that are invested in are like: stocks, bonds, and money market instruments.

Mutual funds have portfolio diversification, professional management, affordability, liquidity, transparency and the regulations that guide it.

Pros and Con of Mutual Funds

Pros of Mutual Funds

  1. Convenience

They are easier to buy and understand. They have minimal investment and are traded once per day hence they are convenient for investors.

  1. Reduction of risk

Mutual funds can invest anywhere depending on the focus. They diversify their funds by investing in different securities and this reduces the risk of them losing their money as they invest in many companies.

  1. They offer dividends

The mutual funds offer dividends to its investor in which the money earned from dividends can be used to purchase for other shares hence increasing the investment.

  1. Portfolio management

They have advanced portfolio management whereby the management fee is paid as part of the expense ratio. The amount is used to hire professional portfolio managers who will buy and sell stocks and bonds.

  1. They buy and sell in large volumes

This reduces the transaction rates as the mutual funds will only buy and sell once hence not losing money in the act of buying and selling small stocks and bonds.

  1. They have fair prices

Prices of mutual funds are fair hence they encourage many investors able to sell them at a good price earning a lot of profit on the shares.

Cons of Mutual Funds

  1. Faster execution times

This may make the investor not get profit as the shares may be sold at the same price they were bought hence difficult for investors to earn from the funds.

  1. Uncontrollable tax

The investor will have to pay for tax due turnover, redemptions, gains and losses throughout the year and this may make the investors pay a high tax rate on the shares.

  1. Management problems

Mutual funds may have a problem in management whereby the manager may want to fix the books so selling the shares unnecessarily. This may also arise when there is a change of management over now and then hence resulting in poor trading of the shares.

  1. High expense ratios

Mutual funds have to look into the expense ratios or else they may get out of hand and this may be an expense to the company as they will use a lot of money to hire the professionals.

  1. Sales charges

The mutual funds should be aware of the advertising fee and sale charges as they may end up using a lot of money without necessarily gaining profit from it.

  1. Lack of liquidity

Mutual funds do not have liquid money and this can hinder investors from trading with them as they may have a challenge in case they need the money urgently.

  1. They have hidden fees

The fees are not included on the list of charges but the investors have to pay for it hence many investors do not like the idea.

Summary

Mutual funds are good for investors who do not require the money fast. Those who need it fast they will end up not earning from it as they trade daily the price of the shares may be the same as the buying prices

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