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Pros and Cons of Mutual Funds

written by: Tim Plaehn•edited by: Rebecca Scudder•updated: 6/29/2011

Investment in Mutual Funds is often regarded as a professionally managed collective investment which follows a particular method of capital distribution to maximize profits. But investing in mutual funds has its own advantages and disadvantages.

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    A professionally managed collective investment that uses funds pooled by many investors and invests them in stocks, bonds or other securities is called a mutual fund. Mutual funds will have a fund manager who is responsible for all investment or selling made by that mutual fund. There are a number of types of mutual funds and each type has its own particular investment objectives.

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    What are the Advantages of a Mutual Fund?

    An investor in a mutual fund is assured that his funds are being used in diverse equities or securities which help to reduce his risks. So even if certain stocks lose value the other stocks in the mutual fund portfolio may actually increase in value, thus reducing the losses. It however does not mean the complete elimination of any losses.

    A fund manager of a mutual fund is a professional who has been in the investment filed for a long time. He also has more funds at his disposal and the time to research all the equities in the portfolio. This enables him to take well informed decisions to stay ahead of the market. As stocks are traded in bulk and at special rates, the cost to the investor is also minimal.

    Investing in a mutual fund is extremely convenient and can be done over the phone, by mail or even online. So the investor does not have to waste any of his time and can do so from the comfort of his home.

    Mutual funds can be sold at any time during market hours and this ensures complete liquidity for the investor. The values of such shares of a mutual fund are based on the net asset value that is worked out at the end of each working day.

    Mutual funds are quite flexible and can accept very low amounts as minimum purchases. This allows the profile of investors in a mutual fund to be quite diversified and not confined to the affluent.

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    What are the Disadvantages of a Mutual Fund?

    Every mutual fund has its own list of fees and charges that the investor would have to pay before he enters or exits from a fund. These are quite high compared to similar charges made to an investor when he purchases or sells equities directly.

    There is no guarantee of returns from mutual funds and the risks are similar to that in the equity market. So if you are looking for a minimum return the better route would be to invest in bank deposits.

    As the portfolio in a mutual fund is diversified it cannot get the advantage of any dramatic rise in any particular equity, except to the extent that it has invested in it. Any overall decline in the market is just as likely to affect the value of your mutual fund investment as it would your equities.

    It is always necessary to see the net returns that you get from any mutual fund investment, as each fund has its own requirement as far as costs are concerned for the management of the fund. They are also liable to tax and this would necessarily have to come from your investment.

    Returns on mutual funds are never as high as those that you can get from investing in equities. So if you feel that the returns you are getting are not adequate, you may withdraw your funds form that particular mutual fund and try your hand at investing directly in equities.