Pros And Cons
- The basic advantage of mutual funds is that it saves time of the investor to search for the right stocks or bond for investment. Many of the investors acquire mutual funds, as it is managed by a professional fund manager. The fund manager has an in-depth knowledge about the mutual funds pros and cons. He is also equipped with the latest investment tools required to make investments effectively and efficiently.
- Another mutual fund advantage is that it helps in diversifying the overall portfolio of small investors. The objective behind purchasing mutual funds is that an investor can pool in its small capital in several stocks and bonds of different companies and industries on one platform. In this way, an investor is in a better position to minimize his loss over an individual stock portfolio, as mutual funds is a combination of different stock and bond portfolios.
- Mutual fund managers are expert in buying and selling securities of large quantity, hence, this would ultimately reduce the transaction cost and provides economies of scale to small investors, which is not possible to earn on individual portfolios.
- The greatest advantage of mutual fund is that it fulfills liquidity needs of investors, that is, one can obtain his investment at any point of time. The fund can be liquidated conveniently.
- An investor can invest small amount like $ 100 in mutual funds. There is no need to inject a large sum of money. The mutual fund process is simple and convenient for small and risk aversive investors.
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- The fund manager is not always a reliable source to rely on. Mistakes can also be made by professional managers. One wrong decision can result into a huge loss. This is the greatest disadvantage of mutual fund.
- Mutual fund managers recruit salesman in order to deal with different clients. These salesmen incur buried costs to acquire mutual funds. It is always possible for mutual fund managers to explain the hidden costs to its investors. Though, the transaction cost is low but the buried costs are much more complicated and difficult to handle.
- Too much diversification also affects the overall mutual funds performance. Since small amount of money is invested in different portfolios, therefore, a huge profit from a particular stock will have minimal affect on the overall mutual fund. Hence, diversifying the portfolio on large scale can be a major disadvantage of mutual fund.
- The economic conditions change rapidly; therefore, they can have adverse impacts on the mutual fund investments. The manager should carefully shuffle the portfolios with the changing business conditions.
- Investors can not interfere in the decisions made by mutual fund manager which is considered to be the major the disadvantage of mutual funds.
Although the advantages of mutual funds and more than the disadvantages of mutual funds but still one must undertake both sides of the coin before making a critical decision about his investment. Moreover, he must be aware of what are the disadvantages of mutual funds and it benefits before handing over his investment to fund managers in order to avoid any consequences in the future.
