What are the benefits and risks of mutual fund?

By | July 24, 2020

Mutual Fund is a monitory structure created from a pool of cash collected from several investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by skilled cash managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives declared in its prospectus.

The individual or small investors can access to professionally managed portfolios of equities, bonds, and alternative securities, every investor will participate proportionately within the gains or losses of the fund.

Benefits

  1. Advanced portfolio management: when Mutual fund is purchased, the expense ratio is paid as a part of management fee and this is used to hire a professional portfolio manager who buys and sells the stock, bonds, etc. This can comparatively small price to pay for getting professional help in the management of an investment portfolio.
  2. Dividend Reinvestment: The funds which are declared from the dividends and other sources of interest income can be used to purchase extra shares in the mutual fund therefore it helps to grow the investments.
  3. Risk Reduction (Safety): Mutual funds are achieved to reduce portfolio risk, as most of the mutual funds will invest in different securities depending on the main focus. Various numbers of stock index mutual funds or more individual stock positions are owned.
  4. Convenience and Fair pricing: Mutual funds generally have low minimum investments which are traded only once per day at the closing Net asset value (NAV). This eliminates price value fluctuation throughout the day and varied arbitrage opportunities that day traders observe. Hence, Mutual funds are easy to buy and easy to understand.

Risks

  1. High Expenses Ratio And sales Charges: If you are not paying attention to expense ratio and sales charges of mutual funds, they can get out of hand. Be more cautious about investing in funds with high expense ratios as they lead to the high-cost end. And also be cautious of advertising fees and sales charges. Usually, not all fund companies will cost sales charges. Fees reduce overall investment returns.
  2. Tax Inefficiency: Investors do not have a choice when it comes to capital gains payouts in mutual funds. The investors typically receive distributions from the fund that are an uncontrollable tax event due to the redemption, turnover, gains, and other losses facing security holding in the whole year.
  3. Poor Trade Execution: If mutual fund trade is place anytime before the cut-off time for same-day NAV, the same closing price NAV for your buy or sell on the mutual fund is received. Investors who are looking for faster execution times, due to a short investment horizon, day trading, or timing the market. A mutual fund provides a weak execution strategy.

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