The pros and cons of mutual funds in investing
A mutual fund is an investment vehicle that many investors use for growing their wealth. Mutual funds are made up of money collected from investors that is used to invest in a variety of securities, such as stocks, bonds and other assets.
Mutual funds are typically operated by financial professionals who allocate the fund’s assets and attempt to generate capital gains. Contributors to a mutual fund share in gains and losses in proportion with their capital invested into the mutual fund.
Pros of mutual funds
- Managed portfolio — Managing individual stocks and other investments can be challenging and time consuming. When you invest in a mutual fund, part of your capital is used for a management fee, so the fund can hire professional portfolio managers who buy and sell stock, bonds and other investments.
- Dividend reinvestment — Dividends and interest declared for the fund can be used to reinvest into the fund, further helping to grow your investment.
- Low risk — Mutual funds are typically very diverse, investing in dozens or even hundreds of securities depending on the fund’s focus. This broad market exposure helps to reduce risk of loss during periods of volatility or if specific companies are performing poorly.
Cons of mutual funds
- High expense ratios — Pay attention to expense ratios and sales charges. Some mutual funds come with expensive fees that can erode an investor’s earnings.
- Tax inefficiency — Earnings from mutual funds are subject to capital gains taxes. Turnover, redemptions and gains in security holdings are subject to taxes that each investor in the fund shares liability for.
- Inefficient trade execution — Mutual fund trades placed before the cutoff time for same-day net asset value (NAV) receive the same closing price NAV for sales and purchases on the mutual fund. This makes mutual funds inefficient for short-term investors, day traders, swing traders or investors looking to time the market.
Talk to a ProVise CFP® professional about mutual fund pros and cons
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about mutual fund pros and cons? Contact ProVise today to schedule a complimentary consultation.