Avantages Dis advantages of mutual funds

What are the advantages and disadvantages of mutual funds?

Mutual funds are currently the most popular investment vehicle and provide several advantages to
investors, including the following:
1. Advanced Portfolio Management
You pay a management fee as part of your expense ratio, which is used to hire a professional
portfolio manager who buys and sells stocks, bonds, etc. This is a relatively small price to
pay for help in the management of an investment portfolio.
2. Dividend Reinvestment
As dividends and other interest income is declared for the fund, it can be used to purchase
additional shares in the mutual fund, thus helping your investment grow.
3. Risk Reduction (Safety)
A reduced portfolio risk is achieved through the use of diversification, as most mutual funds
will invest in anywhere from 50 to 200 different securities - depending on their focus. Several
index stock mutual funds own 1,000 or more individual stock positions.
4. Convenience and Fair Pricing
Mutual funds are common and easy to buy. They typically have low minimum investments
(some around $2,500) and they are traded only once per day at the closing net asset value
(NAV). This eliminates price fluctuation throughout the day and various arbitrage
opportunities that day traders practice.
However, there are also disadvantages of mutual funds, such as the following:
1. High Expense Ratios and Sales Charges
If you're not paying attention to mutual fund expense ratios and sales charges, they can get
out of hand. Be very cautious when investing in funds with expense ratios higher than 1.20%,
as they will be considered on the higher cost end. Be weary of 12b-1 advertising fees and
sales charges in general. There are several good fund companies out there that have no sales
charges. Fees reduce overall investment returns.
2. Management Abuses
Churning, turnover and window dressing may happen if your manager is abusing his or her
authority. This includes unnecessary trading, excessive replacement and selling the losers
prior to quarter-end to fix the books.
3. Tax Inefficiency
Like it or not, investors do not have a choice when it comes to capital gain payouts in mutual
funds. Due to the turnover, redemptions, gains and losses in security holdings throughout the
year, investors typically receive distributions from the fund that are an uncontrollable tax
event.
4. Poor Trade Execution
If you place your mutual fund trade anytime before the cut-off time for same-day NAV,
you'll receive the same closing price NAV for your buy or sell on the mutual fund. For
investors looking for faster execution times, maybe because of short investment horizons, day
trading, or timing the market, mutual funds provide a weak execution strategy.
Definition
An open-ended fund operated by an investment company which raises money from shareholders and
invests in a group of assets, in accordance with a stated set of objectives.



Definition of 'Mutual Fund'

An investment vehicle that is made up of a pool of funds collected from
many investors for the purpose of investing in securities such as stocks,
bonds, money market instruments and similar assets. Mutual funds are
operated by money managers, who invest the fund's capital and attempt to
produce capital gains and income for the fund's investors. A mutual fund's
portfolio is structured and maintained to match the investment objectives
stated in its prospectus.

Investopedia explains 'Mutual Fund'

One of the main advantages of mutual funds is that they give small
investors access to professionally managed, diversified portfolios of
equities, bonds and other securities, which would be quite difficult (if not
impossible) to create with a small amount of capital. Each shareholder
participates proportionally in the gain or loss of the fund. Mutual fund
units, or shares, are issued and can typically be purchased or redeemed as
needed at the fund's current net asset value (NAV) per share, which is
sometimes expressed as NAVPS.