Advantages and Disadvantages of Investing in Mutual Funds
Investing in mutual funds has been one of the most popular investment strategies for many years. A mutual fund is basically an open-ended professionally managed investment fund that pools money from a number of investors to buy securities in a variety of different sectors, each with different characteristics. Mutual funds usually are “the greatest proportion of overall equity of U.S. companies.” In addition to being diversified, they also typically include some form of asset protection for their customers’ assets.
Many people think that it is relatively easy to invest in mutual funds and see great returns. Unfortunately, as with any investment strategy, there is a certain amount of risk involved. In addition, it is important to do your research on a company before putting all of your savings into one type of fund. If you have specific financial goals in mind such as becoming rich quick, then you may want to focus on funds that are specifically designed for these types of individuals. More traditional investors may want to learn more about common pitfalls of mutual funds and how to avoid them.
One major disadvantage of buying individual stocks is that they can have a significant effect on your net worth. When you purchase shares in a corporation, they become an additional asset for your family. In turn, they will generate capital gains when they are sold. The problem is that mutual funds can’t provide this same advantage to you. Investors who have a large investment portfolio tend to gravitate towards these types of funds to meet their financial goals. These investors must weigh the benefit of the capital gains against the amount of work they have to do in order to ensure that their portfolio is maintained.
Another drawback of investing in individual stocks and bonds is that if a company goes bankrupt, you are not guaranteed your investment. Most funds follow a well diversified portfolio approach, which means that there are usually several kinds of assets included in each portfolio. Therefore, should a company go under, your money will be divided among all of the different asset classes in your portfolio. Diversification can prevent investors from experiencing the dreaded “black swans” scenario. Although it is true that some funds might experience a mild drawdown during a recession, most will fare much better than this.
The final disadvantage of investing in individual securities is that you aren’t sure what will happen to your portfolio if the market suddenly experiences a huge downturn. This can be very difficult to manage for many people who have their main investment objectives long-term. Many long-term investors stick with their portfolios even during times of financial trouble. However, these investors must do a lot of research to keep track of their portfolio’s performance throughout the market cycle. Because of this, they are unable to successfully diversify their investments until the market has recovered from the downturn.
Investing in mutual funds allows you to easily meet your various investment objectives. You can diversify by investing in different types of assets, spread across several different categories, or invest in just one type of asset. Because they are offered in a wide variety of shapes and sizes, you can choose the fund that is best suited to your needs. You also have access to a wide range of investment options through different types of fund houses.