I would like to know about pros & cons of investing in mutual funds?

Answer 1

Mutual funds are pools of money. Money from many different individual investors can be pooled with money from, say, the retirement fund of a global corporation.

This money is managed full time by professionals who are paid for their financial management expertise.

Mutual funds invest in a portfolio of stocks (equities), bonds or money market instruments. You, the shareholder, own a proportionate part of the fund in much the same way you would be an owner of a company in which you buy stock.

If a stock fund invests in the stock of 50 companies, you own a part of those 50 companies. You share ownership in the fund with other individuals and sometimes institutional investors.

If investing in mutual funds has similarities to investing in stocks, there is one difference. Most funds are open-ended funds. An open-ended fund is one where there is no fixed amount of shares outstanding.

Investors can buy shares in an open-ended mutual fund at any time, and in unlimited quantities, as long as the fund is open to new investments. This is in contrast to stocks and closed-end mutual funds, which issue a certain number of shares.

The Advantages of Mutual Fund Investing
Diversification: when you invest in a mutual fund you get instant diversification of your holdings by owning a part of each company that your fund invests in.

Professional Management: mutual fund managers have more time, expertise and resources to manage investments than most individual investors do. However, fund managers have widely varying levels of experience and different track records, which you should examine carefully.

Convenience: mutual funds provide a great deal of convenience for busy investors. Not only is it fairly easy to purchase fund shares, but mutual fund companies also offer automatic transfers and reinvestments of dividends and capital gains. You can also transfer your money from one fund to another.

Selection: there is a mutual fund available for virtually any type of market sector that you might be interested in.

Liquidity: mutual funds offer an important combination of appreciation potential plus liquidity. Shares can be redeemed at the end of each day, based on the fund's net asset value (NAV).

Concise information: based on mandates from the Securities and Exchange Commission (SEC), fund companies are obligated to provide a simple, easy-to-understand prospectus and investor reports. A prospectus spells out a fund's goals, strategies, fees and expenses. The shareholder report describes the fund's most recent performance.

Protection: while mutual fund investors are not insured against investment loss, rules do exist that regulate mutual fund transactions, advertising and communications with investors.


The Disadvantages of Mutual Fund Investing
No guarantee: as previously noted, mutual fund investors are not protected by any guarantees against losses in their fund investments. Stock mutual funds invest in stocks, and the stock market rises and falls. Individual holdings within a fund, and individual funds, fluctuate in value.

Fund objectives: there are several investment information companies that categorize funds by their investment objective. Make sure that your fund manager invests according to the stated objective. Some funds drift away from their stated objective, and your money could be sitting idle as cash or being invested in different types of securities than the fund's objective states.

Diversification: yes, diversification is both an advantage and disadvantage in mutual fund investing. While investing in a large number of companies through a mutual fund insulates you from taking a huge loss in the stock market, it also prevents you from realizing a large gain that a smaller portfolio might realize.

Fees: mutual fund fees vary widely from fund to fund, and in many cases, exceed the cost of employing a full cost broker. Be aware of front-end sales charges, back-end sales charges and ongoing operating expenses that cut into your returns.

Capital gains: unless your mutual fund investment is in a tax-sheltered account, you will be obligated to pay capital gains tax on the distributions you receive from mutual fund companies. By law, a fund's capital gains are passed on to shareholders who must pay tax on them.


How a Typical Mutual Fund is Structured

A mutual fund is structured as a corporation or business trust. Mutual fund shareholders receive regular statements and reports.

The fund itself has no employees. An independent board of directors oversees a fund.

An investment adviser or management company is hired to manage the fund's holdings and make all buy and sell decisions.

Mutual fund shareholders do not participate in portfolio management decisions, although they may receive notice of meetings and may be asked to vote on issues related to fund owner.

Answer 2

the pros of investing in a mutual fund
- you get exposure to a variety of stocks in your portfolio that you may not have afforded on your own.
e.g. bank stocks range from $40-$60 approx, if you were to buy several shares of each bank, plus add a few more companies, so you have a diversified portfolio, you can see you would need alot of money. With a mutual fund, you usually only need $500-$1000 to start and the fund may be invested in 30 - 100 companies.
-You have a professional looking after the money and deciding what to buy and when.
-you get sent statements and all the necessary paperwork so its easier to keep track of.

cons
- all funds charge a fee, some charge less than others.
- you don't have a say as to what stocks are bought and when, but you do choose the mutual funds themselves which gives you some control.

Mutual funds are best for someone with neither the time/money/expertise to run a well diversified portfolio on their own.
(don't underestimate how much money/expertise is required to be successful)

Answer 3

Mutual funds is a good starting point for investors who do not have the time to research on stocks themselves.

The Pros are:
1. save you the trouble (or robs you of the fun of) of researching on potential stocks and to construct a portfolio of your own.

2. easy way to get involved in the stock markets.

The Cons are:
1. MANDATE! - Every mutual fund has a FIXED mandate that requires them to be almost fully invested at all times. As mutual funds have portfolios that are generally bullish, they only do well when stock markets do well... if the stock market crashes, the fund crashes with it and there is nothing the fund managers can do. The mandate prohibits the fund managers from bailing out of the markets even if they know the market will crash! This brainless way of investing in the stock markets has made hedge funds a lot more attractive recently.

2. Fund Expense. There is a fixed expense ratio for every fund which pays for the fund manager's salary, admin costs, advertising costs etc... The profit performance is what is left after all these are paid for. That is why you see many fund managers driving nice, big cars even though their funds are not performing well.

3. Tie Down Period. There is always a tie down period where you cannot withdraw out of a mutual fund without incurring some kind of penalty charge. That can rob you of short term cashflow when you suddenly need money.

4. Withdrawal Charge. Yes, even if you fulfill the tie down period, there will usually be a withdrawal charge for getting out of the fund.

Profiting from the stock markets is already a difficult thing to achieve consistently. By investing in a mutual fund, it makes the difficult thing more difficult by having so many expenses built into it. Frankly, when the markets do well, you would be better off just buying an ETF on the local index and when markets start to fail, you will be able to bail out quickly and safely without any penalties or expenses at all.

Mutual funds is only one of the many ways to get involved in the stock markets. There are a lot more ways, some safer and with higher returns, to invest in the stock markets and you need to read and research on your alternatives.

I recommend some pretty good books that have benefitted myself at http://www.bestoptiontradingbooks.com

hope these helps.




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Answer 4

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).

Convinced 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 5

Putting money in mutual funds is like handing over your money to a bunch of experts for investing in stocks. These experts are supposed to be well versed with market movements and are expected to get best out of it for you with some commision charged for their hardwork.

Advantage:
1. They research and invest, you need not bother are paying a cheque.
2. They are certainly more knowledgable than we as individual investors
3. Most of the times, they come up with gains

Cons:
1. You dont have control over the money
2. No gaurantees, you may loose some money as well
3. You cannot decide on the portfolio
4. There is some entry and most of the time some exit load. Money is locked in for some period of time as well.

If you are yourself not sure about market movements, then its better to use mutual fund options. It has better probability of yielding favorable returns.

Answer 6

Before investing in mutual fund understand whole variety and suitable to your needs, they vary with risk and return. Having invested keep tab, in case funds that are volatile. Stay away if you are not sure the investment meets your needs.

Answer 7

Pros, you might make money.
Cons, you might lose money.
Thats life 101.
It is a legal and respected form of gambling, there are no garuntees that you will make a profit, but the person or entity that sold them does make a profit, you have to wait and see if you won or lost.

Answer 8

I would not do it any time soon. Look for a big market collapse with the democrat victories.