Mutual funds is one of the simplest yet effective ways of investing. Just in case you’re wondering what mutual funds are, they’re a pool of money gathered from several investors and are invested in several securities such as stocks and bonds handled by a professional fund manager. Basically, investing in mutual funds is just like opening a savings account. You fill up the necessary forms, provide the necessary requirements and at least the minimum amount to open an account, and you could forget about your investment for the next 10 years. It’s as easy as that isn’t it? However, mutual funds carries some pros and cons with it, after all, there is no 100% foul proof investment because if there is then everybody is already rich by now.
Here’s a rundown of the pros and cons of mutual funds:
1.) Mutual funds are easy and simple. Among the very reasons that holds people back from investing are the limited knowledge that they have and the complexities that investing brings. Many aren’t willing to pay the price for it. In mutual funds, a professional manager handles all the pooled money and is the one doing the investing in behalf of the investors. These professional managers have years of experience under their belt thus the assurance is there that our investments are in good hands.
Another great thing about mutual funds is that it doesn’t require much knowledge to start with. As I have mentioned earlier, opening an account in mutual fund companies is basically the same as opening a savings account in a bank.
2.) Mutual funds are liquid. Another thing that keeps people away from investments is that investments are for long term and they just can’t wait that long to reap what they have planted. Though recommended for long term, redemption in mutual funds is fairly easy. As long as you still have funds in your account, it’s as easy as withdrawing from a bank.
3.) Mutual funds are affordable. A very common misconception about investments is that investments require a lot of capital. There are a lot of investment opportunities that doesn’t require a lot yet are promising great gains (in the long run to say the least) and mutual funds is one of them. In the Philippine setting, you could open a mutual fund account for as low as P5000 (roughly $120) with potential returns that could go as high as 50% in a year. Now that’s affordable.
4.) Diversification of investments. Since fund managers are investing in different securities, the company’s portfolio is well diversified thus the risk is reduced. Have you noticed the slow decrease of the NAVPS of mutual funds when the market is going on a steep downhill? A well diversified portfolio is a good portfolio. Mutual funds is one of those.
1.) Mutual funds aren’t insured. Since mutual funds are investments and not savings, they typically aren’t insured. It’s one of the risks to take in mutual funds. Though ideally your investment will never be gone as long as you still have shares in your hand, if the value of your investments decrease, your equity will decrease as well.
2.) Mutual funds are intended long term. For some people, the agony of waiting might just be too much to bear making mutual funds a deadly territory to invest in. Mutual funds aren’t spared from the market fluctuations thus if it is done for short term, the risks are multiplied tenfold. Mutual funds are following the concept of cost averaging. In cost averaging, the short term fluctuations doesn’t matter much because in the long run the value of a particular stock or a number of securities will go up. Patience is a virtue and in mutual funds, it is money. However, patience also means waiting for something like 10 or 15 years before harvesting some really serious gains.
3.) Hidden charges. Some mutual fund companies have high loads of charges (though there are some that doesn’t have or have minimal ones). Do some company check before investing in one because the fees might just pull your investment down.
All in all, mutual funds are great investment opportunities for common folks who doesn’t have the sufficient background about investing and the money market. It’s simplicity and convenience outweighs it’s disadvantages making it one of the best money market tools there is.
Mutual funds are gaining some popularity and credibility lately and even experts suggest that mutual funds are great substitutes for retirement plans, educational plans, and life savings.