Investing on mutual funds requires a great deal of knowledge and know-how about the whole system since it involves your money and probably your fortune. Because like any other investments on earth, there are risks involve and gains acquired.
How mutual funds work?
Mutual funds are open-end funds owned mutually by several investors or individuals. The money collected is invested on several underlying investments like mortgages, stocks, bonds, real estate and treasury bills to grow and gain interest. A person and groups investing on mutual funds are called shareholders. The investment manager decides whether to buy, sell or trade these stocks with considerations on loss, gain, and security among others.
Advantages and disadvantages of investing on mutual funds
Like any other investments, investing on mutual funds has its advantages and disadvantages. The primary advantage is that upon investing on mutual funds, your money are taken care by professional money managers. These people are responsible in research, selection, and monitoring of the movement of your money.
Another advantage of investing in mutual funds is that your money is scattered on other investments but are still monitored. Without mutual funds, you personally cannot do that.
Investing in mutual funds does not require is a big amount of money. You can enter on mutual funds with few bucks and can progress from there.
In time you want to pull out your investment, you can easily redeem your mutual funds shared at the current net asset value.
The primary disadvantage of investing on mutual funds is the cost. An investor must pay the annual fees, sales charges, and every cost in between and these fees must be paid regardless of how well the investments perform. You also have to carry the burden of the pay taxes.
Another disadvantage is price uncertainty. Since your money is invested on several stocks, you cannot determine how much your total stocks cost unlike individual investments where you can easily determine the price of your stock in real time.
And since you are giving your money in the hands of a professional investment manager, you cannot dictate where to place your investments.
Factors to consider
Investing on mutual funds, an individual must consider four things: the degrees of risk, the different classes of funds, the payments and other charges, and the tax consequences. All these should be studied properly to avoid getting confused in the long run.
If you want to make sure or would like to know more about mutual funds, it is also advisable to hire finance experts and stock consultants.