Are Mutual Funds a good way of investing? What are the pros and cons of investing this way?

Question

about how much inconme would i get if i joined a mutual fund>?

Answer 1

Mutual funds are appropriate for some and the wrong investment for a growing number of people.

For me, I would NOT invest in mutual funds if it weren't for having a 401K.

Overall, Mutual funds are not good (once you're educated in investing) and many people should not invest in mutual funds unless you have to (like if it were a requirement in a 401K).

Here's why.

First of all, mutual funds exist to take average person's money.

Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's often the gauge. A monkey, yes monkey, can usually outpick most mutual funds. Over 60% of the mutual funds out there can't even outperform the market. That's VERY SAD!

Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees are 0.5% to 2% annually.

Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT "losing" you lots of money. That way you stay with them and they continue to collect their fees.

Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush talks in the morning and you call your broker to sell because the market is now tanking, the broker will gladly take your order, but the order will not be executed until the day is over and the negative impact is already priced into the fund.

Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of your money as well.

Seventh, mutual funds have to be in the market. So if the market is crashing or going down like it has between May and now, then the funds still have to be in the market and taking those losses too. With some practice, you can time your monies to avoid some of those losses (it'll take practice).

Convniced yet? Need more?

Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into just the sectors you want, like metals, or housing, or energy, etc. or right now, Brokers/Dealers, Retail, and insurance!

Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund with $10 billion in assets. 1% of that money is $100 million. How many companies are this big where $100 million investment isn't the whole company? Do you want to limit yourself to just those larger companies like Times Warner, Microsoft, home depot, cisco, ebay which have been sideways for years? I think not.

A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks, so are very liquid, and do not have the high fees like the mutual funds. Further, you can buy/sell them as you wish. They represent sectors or indexes, so buying them gives you the same diversification as the sector/industry/index, but with much less overhead!

See Amex.com (american stock exchange) or ishares.com, holders.com for more info.


You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the shortcomings (and as you can see, there are many).

Let me know if you have further questions.

Best of luck!

Answer 2

Mutual funds are good for people who do not want to take care of buying and selling their stocks all the time. Instead either a fund manager does that or the fund is an index fund. Managed funds have a higher expense ration, index funds can be cheap.

The yields - really that depends on the fund or funds you chose. the more risk the more gain. Mutual funds are meant as longterm investments and medium risk. Around 8-10% per year yield is possible with medium risk. With high risk you can gain as much as 30-50% - but you can lose as much. If you want to play risky you should invest in stocks or ETFs - just because you can play that market then better and faster.

Some markets - like emerging markets - make sense to have a managed fund. Just because such a manager often knows a specific market (China for example) really well. Better than you can ever know.
Others - like the S&P can easily be indexed. The Vanguard S&P Index fund is a cheap example or the ETrade S&P fund.

And then there are "ETFs" Exchange traded funds. Which are like funds - just you can trade them like stocks directly. They have cheap expenses normally too.

I am too busy with my job and other things so I just have a few mutual funds and picked them: Most stars (4 or 5), least expense ratio and a variety so I am diversified. The average yield per year is 8-10% in my portfolio after expenses. I am happy with that.
Before that I had a couple of stocks and did a really poor job on watching them and selling and buying, so I lost almost everything when the companies went out of business and I had not looked into my portfolio for some months...LOL. So - for me- never stocks again. It is a personality question, I am not a control freak enough and rather delegate such tasks.

Answer 3

Mutual Funds are an excellent way to invest! There is an abundance of research on mutual funds and investing, etc. Your chances of picking a stock or group of stocks that will outperform the market are slim to none, so often, a mutual fund helps reduce risk and compensate for a lack of expertise. I would suggest a book, "A Random Walk Down Wall Street" by Burton G. Malkiel.
Mutual funds can basically be described as a group of investorts with common or MUTUAL objectives. The investors' money is pooled together in a FUND and a professional money manager(s) invests that money in accordance with the "funds" stated goals or objectives.
You can invest in a sector of "the market", a variety of total stock markets, or in funds designed to follow a particual index such as the S&P 500, etc. You can find mutual funds with "no load" which is to say that there is no commission or fee to invest, but all funds have some fee or cost. You will always incur a fee to invest in stocks, whether in commissions or in a small percentage fee. Money managers don't work for free ;). It is your responsibility to educate yourself with regard to fees and pay as little as possible so as to maximize your investment.
A Roth IRA is a provision of the tax code for investing, NOT an investment. Go to a bookstore or go online and start doing some reading and research before you give anyone your money. Due diligence is up to you. There are so many options in the world of finance and investment. Think about your goals and what you hope to accomplish and invest accordingly after doing some research. Just remember you can only lose all your money...which is comforting b/c with a credit card you're losing money you don't even have yet. ;)

Answer 4

Please take the first two answers seriously. 1) I checked 3 top sources and found no mention of any Allstate Muni fund. We don't know what you are being sold, and apparently neither do you. Red flags everywhere. 2) As Joey points out, successful bond investing requires rock bottom costs. Never pay a load on any fund, especially not a bond fund. If Allstate is re-marketing funds from another firm, that is an extra layer of fees. Another red flag. 3) If you are in a high tax bracket, and Vanguard or Fidelity has a low-cost single-state muni fund for your state, consider it. Any other muni fund is a dumb investment. To sum up: Pros: None that I can see. Cons: Yes, you are being conned.

Answer 5

There are a lot of pros and cons because there are a lot of mutual funds--thousands.

pros:

diversity of investments, no need to keep a eye on they all the time, an annual review is sufficient, reputable rating services to help find good ones (Forbes, Moringstar), easy to invest in them

cons:

70% underperform the market in general, past performance does not guarantee future performance, tax consequense can be terrible (mutual funds must distribute realized capital gains annually)

Income depends on the type of mutual fund you invest in. Some are income oriented and others are capital growth oriented. There are mutual funds that distribute about 10% annually in income, but that is all taxible and most of it at the full tax rate.

Answer 6

Mutual funds are great for people with large amounts of money. They offer a professionaly managed and diversified portfolios.

Pros:
Risk spread across several companies
Managed by professionals who know what they're doing

Cons
High fees
Generally beat the market, but not by much

Alternative:
Invest on your own and save money. Or go with a composite fund like QQQQ, a stock consisting of all companies traded on the NASDAQ stock exchange. Your risk is spread across several companies and you don't pay any fees!

Graciously
The Investing Sensei
http://www.investingsensei.blogspot.com

If you have any other questions, comments, or concerns you can contact me at:

My Site: http://investingsensei.blogspot.com
Email: [e-mail]

Answer 7

Stay away from Mutual funds. You lose alot of money from "fees" Open a Roth account on Sharebuilder.com and buy VTI. It is a total stock market ETF. Your return will be that of 100% of what the stock market is. Do this while you are still young and then just forget about it until you are old and ready to retire and you will be rich.

Answer 8

1) Yes.
2) Pros: You make a lot of money. Cons: You lose a lot of money (If you pick the wrong mutual fund at the wrong time)
3) Millions.

Answer 9

do not use mutual fund, in case the stock drop 22% in one day like oct 1987, your investment would wipe out
using ETF

Answer 10

This question has been asked many times before here

In the "Search for question:" box at the top of the Ask/Answer page, just type in "Mutual Fund," and you will get hundreds of answers.