Are Mutual Funds a Good Investment Option for You?

Mutual funds have been greatly advertised as a fine way to boost personal finances. Before you join the bandwagon, it helps to know some factors regarding mutual funds in order to make the best decision.

A mutual fund is a collection or a pool of funds from different investors (usually small investors and private individuals), and this pool of funds is managed and used by a mutual fund company to buy securities.

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Benefits of Mutual Funds

The viability of any investment option is dependent on your preference and circumstance. The following list of advantages is simply to guide you in making decision.

  1. Expert Fund Management – not many private individuals have the capacity to manage their investments with professionalism and precision as much as established investment firms do. By buying mutual funds, you are entrusting your money to a professional who monitors, selects and manage your money for you.

  2. Investment Diversification – with limited financial resources, it’s almost impossible to diversify your investments. With mutual funds, the little that you have is pooled together with other investments and then used to buy different securities (investment portfolio).

  3. Affordability – as a private individual, your investment can only go so far. But once it’s pooled, it transforms into a large sum enough to buy expensive securities.

  4. Greater Liquidity – you can readily exchange shares for cash at the current net asset value less deductions, at any given time.

  5. Convenience – every due diligence procedure is done for you by the mutual fund company.

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Pitfalls of Mutual Funds

Like any other investment, mutual funds pose risks that you should consider before deciding.

  1. Fees Despite Poor Performance – you are required to pay certain fees such as annual fees and sales charges whether the investment is profitable or not.

  2. Less Control – you basically entrust everything to the investment firm, and they may not be very generous regarding timing of capital gains, for which you get to pay for capital gains. Also, the investment firm decides on the portfolio or makeup of investments for you.

  3. Unpredictability – the price of mutual funds is so uncertain mainly because they are invested in different securities. It is likewise hard to monitor actual price fluctuations because the makeup of the investments are not readily available and are subject to sudden changes.

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