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What are the Advantages and Disadvantages of Mutual Funds?
Mutual funds pool investments of like-minded investors and invest the cumulative sum in large and diversified investment projects. This helps small investors access big projects which they might not access individually.
Advantages of Mutual Funds
There are some distinct benefits of mutual funds such as the following −
Simplicity
Mutual funds are an easy means for small investors who do not have quite a good knowledge of the stock market or the shares being traded in the markets.
Small investors who cannot access large projects can simply invest money in small amounts which are pooled by the mutual funds and invested in the market.
The investors of mutual funds need not have critical knowledge of the market. It is taken care of by the fund managers.
Diversification
Mutual funds offer investors a way to diversify their investments.
Small investors with limited budgets cannot invest in many projects which are done by mutual funds.
This also helps investors face less risk as fund managers take care of investments in securities, bonds, and other forms of financial tools to grow the invested funds.
Professionalism
Mutual funds are managed professionally by fund managers which may be absent in the case of individual investments.
Affordability
Mutual funds do not require too much investment as they pool funds from many investors with similar kinds of investment goals. That is why it is considered an affordable and mutually beneficial tool for investors and investment companies.
Flexibility
Mutual funds investors do not need to roam around buying and selling shares to grow their investments. Mutual fund companies offer the flexibility of investment by phone and online. This offers great flexibility to the companies and investors.
Disadvantages of Mutual Funds
Following are some of the disadvantages of mutual funds −
High Expenses
The fees associated with mutual funds is comparatively higher as they include sales fee, management fee, and funds expenses. Besides these, there are various redemption fees too. In general, these fees amount to too high for individual investors. There is an additional brokerage fee applicable in case of mutual funds transactions too.
Hidden Costs
In the case of mutual funds, there are many hidden costs associated with mutual funds. There is usually a turnover rate that is proportional to the rate of turnovers. These costs increase the overall cost of mutual funds altogether.
Cost of Diversification
As mutual funds have a small portion of the bigger shares, the gain from large shares may be limited in the case of individuals who own shares of large companies. Therefore, although the companies in which mutual funds invest may earn good profits they may not be distributed in an equal proportion to the investors.
Risk of Ownership
Like any other form of investment, mutual funds' owners face risks of ownership. With a market downturn, the value of funds may go down and in case of a market crash, the investment value may go down to zero.
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