5 Major Pros and Cons of Mutual Funds

5 Major Pros and Cons of Mutual Funds

by / Comments Off / 336 View / Mar 29, 2015

Using your money to generate additional revenue is one of the best ways to expand your financial holding and plan well into retirement. One of the primary reasons why more people do not invest is because of how complicated investments can be. Comprising its own lingo and terminology, investing requires a steep learning curve.

Thankfully, there are ways to invest without the time investment required to learn. Mutual Funds are designed to provide a diversified portfolio for individuals looking to invest their money across a number of different things. Run by a licensed company, a Mutual Fund exists as a pool of money from a number of different investors like yourself. When the stocks do well, every person gets a payout. Lets take a moment to review the pros and cons of this investment tool.

The Pros of Mutual Funds

1. Allows For Investments Without Extensive Research
As we alluded to above, making smart investment decisions requires having a solid understanding of US markets, terminology, and trade practices. This takes people years to learn, and a lifetime to master. A mutual fund allows for you to skip having to learn about diversified portfolios by hiring another group to do it for you. Taking your money, they use their expertise to invest it in a number of different sources. Through their services, you can get an intelligently defined diversified portfolio.

2. Allows For Diversification of Portfolio
We have frequently mentioned the benefits of a diversified portfolio. So what does a diversified portfolio provide for you? Simply put, diversification means reduced risk. Every investment you have will come with risk attached. If all of your investments are in a single thing, then you have a high degree of risk. By spreading your money out, you reduce the amount you lose if one of your investments goes belly up. A mutual fund diversifies your investments for you, reducing your risk without increasing the amount of work you have to do.

3. Can Be Tailored Towards Your Financial Interests
What type of things would you like to invest in? Mutual funds can be themed around a variety of different investments depending on what your needs are. For example, if you want to invest in any combination of utilities, real estate, stocks, gold, bonds, and much else, then you can find a mutual fund that specializes in those types of investments. In addition, I you are interested in low or high risk investment portfolios, then you can pick the mutual fund that best fits your interests. With a little bit of searching, you will be able to find a great deal of investment types.

The Cons of Mutual Funds

1. Fees and Expenses
By using a mutual fund, you make use of someone else’s experience and expertise. That experience is not free. Depending on the mutual fund you sign up for, there will be a whole host of fees and expenses that you will have to consider. One of the most common fees is an early withdrawal fee if you decide to pull your money out before your contract is complete. In addition, there may be fees for changing what parts of the mutual fund you are investing in, as well as taking any amount of money out early. Prior to signing up for a mutual fund, you should carefully review all fees and expenses associated with their use. Be sure to ask questions and get definitive answers before you agree to give them your money. While the majority of mutual funds are not considered scams, there may be less scrupulous mutual funds that make the majority of their profits through fees and expenses they take from you.

2. While Risk is Reduced, There is Still Risk
A mutual fund diversifies your risk and spreads your wealth across numerous sources. While this reduces your risk, it does not remove it. There are still a few ways that you are exposed to potential risk. The first is through the competence of the investors running the mutual fund. If the investors invest poorly, then you and everyone else that is a part of the mutual fund will lose out as a result. Another potential source of risk is if the mutual fund is invested in a single industry. For example, if your mutual fund is associated with tech companies, then anything that happens to the tech company will affect your returns. A sudden downturn in the industry could see your financial earnings plummet.

As reviewed above, mutual funds have their various pros and cons. As a final consideration, remember the general rule that people follow when it comes to investments. Markets generally go up over time. This means that if you invest your money long enough and do not pull out early, then you are more than likely to make back a profit in the end.