There are a array of benefits to investing in mutual funds; some of these advantages will be discussed below:
(1) Mutual funds don’t demand large up front sums to get the investment rolling:
If you only have $2000 to invest, it will be difficult for you to assemble a varied stock portfolio. By investing in a mutual fund you are getting a very miniscule portion of more than one organization. You can purchase mutual funds for as little as $30/month, often if you plan on investing a specified dollar amount monthly.
(2) Relatively easy to purchase and sell:
You can purchase a mutual fund through three different avenues: Financial advisors; from the fund companies or banks in question; or through a discount brokerage firm. No matter the means you acquire them; you can still purchase and sell them relatively easily. There are most likely redemption fees attached to the fund, which could cost you a departing fee. Capped funds are a different story. They no longer accept new investor’s money, as they only except further investments from current shareholders.
(3) Mutual Funds are regulated:
The industry, in which the fund is represented of, is covered under provincial securities legislation. This legislation establishes the rules by which funds are traded, as well the details on the different types of information that must be provided to potential buyers of the fund.
(4) Mutual Funds are professionally managed:
When you plan on buying or selling mutual funds you need to know how to read cash-flow statements, and how to calculate growth duration. To avoid knowing this knowledge, you pay the mutual fund manager to select the best securities for you, for often at a nominal fee of 1 percent.
As there are pros to purchasing mutual funds, there are some downsides, these are addressed below in greater detail:
(1) The returns on the mutual funds are not guaranteed:
Although the mutual funds are government regulated, you will not know how much money your fund is generating or losing. Government Deposit Insurance does not cover mutual funds, only savings, banks, loans, and credit unions. You could lose money in the fund, because the value of the fund is nothing more than the value of its holdings within a particular portfolio. If the value of these holdings decreases, so then will the mutual fund. It is uncommon that an investor will lose all of their money in a mutual fund, as all of the stocks in a given portfolio would have to drop substantially for this to become a reality.
(2) Most funds are not designed as short-term earning investments, but rather better for the long-term.
(3) Fees and associated expenses:
You will need to pay the mangers of the mutual funds. There are also redemption fees, sales commission fees etc.
(4) Tax Consequences:
Some mutual funds will have tax consequences associated with them, which greatly depends on the individuals’ situation. The mutual fund manager knows nothing about the individuals tax planning and can’t make their decisions as such to match the investor’s tax planning needs. As the investor, you may be left with taxable gains in a given year, when you don’t have taxable losses to offset these gains, this can occur when buying and selling are at still.
Equally presented in this account are both the pros and cons of investing in mutual funds. It is wise to do more research, as you find yourself getting further interested in mutual funds and investing in them.