Essay on advantages and disadvantages of Mutual Funds

Free 800 words essay on advantages and disadvantages Of Mutual Funds for school and college students.

Mutual Funds are well known investment field these days. These are basically the diversified investments. These lower the risk of the investors and like everything else they also run on both the advantages and disadvantages. So, beginning with the good things, let’s take a sneak peek into the advantages of the Mutual Funds, followed by the disadvantages.

Free Essay on advantages and disadvantages of Mutual Funds

Advantages of Mutual Funds:

 

There are many advantages of investing in a Mutual Fund like

 

  • Quick Diversification: You get a basket of stocks with the investment in the Mutual Fund. A diverse portfolio is the simple and basic rule in Mutual Fund investments. Thus, with a fanned out investment, if one stock results in losses, other stocks diversify it with their performance.

 

  • Professional Touch: Mutual Funds investments are managed by the professionals who are experienced and trained. They are vigilant and keep a keen eye on what is going on with your hard earned money. They keep your investment safe.

 

  • Ease of Liquidity: The best part of investing in the Mutual Funds is the liquidity that they provide. These can be sold immediately and the funds take only a day to come back into your account. Unlike those individual stocks that take forever to liquidate.

 

  • Reinvestment: In Mutual Funds you are allowed to reinvest your dividends and interest as well. Thus, you can grow your portfolio easily without having to pay the regular transaction fees for buying additional shares of Mutual Funds.

 

  • The Range: If you are an aggressive or risk averse investor, this is the place of investment for you. They offer the investment range like the emerging market funds, balanced funds and investment grade bond funds. Also, there are life cycle investment funds that decrease the risk as you near your retirement. You can buy and hold a fund or you can get in and out of the holdings. The bottom line is no matter what kind of investor you are, Mutual Funds have enough to offer you.

 

  • Affordable: Investing in Mutual Funds is quite affordable for anyone. You can begin with a tiny sum and can gradually grow your portfolio into something massive. You don’t need much to become a Mutual Fund Investor.

 

These advantages make Mutual Funds an attractive field to invest in. And it is with these highlights that it has been attracting many investors of late. But where there are fairies, there are bound to be witches as well. Even such attractive looking Mutual Funds have certain disadvantages.

 

Disadvantages of Mutual Funds

 

  • No Intraday Trading: You can’t trade your Mutual Funds intraday. The net asset Value price for these funds are settled at the end of each trading day. Hence it is highly unlikely that you will be knowing the NAV when you lock in the trade. So if have not locked in your business before the end of the trading session, you will receive the NAV price that will be set at the end of trade the following day. Hence, Mutual Funds makes it impossible to capitalise the sudden movements in the market most of the times.

 

  • No Tax Efficiency: Unless You are investing with an IRA account, you will have to suffer the taxes. Generally, you will be taxed on your gains anytime you sell your stocks. However, Mutual Funds processes the distribution of capital gains once a year. And you will be taxed even if you haven’t collected the gains that year. Moreover, the funds can delay the distribution of capital gains to later years, adversely impacting the investors.

 

  • Herd Impact: Market place is volatile, and if you are a disciplined investor, you will know that buying high and selling low are not good strategies. Hence, you will not panic when the volatility hits the market. But not everyone has the same discipline, especially when you are investing in a large Mutual Fund Holding. They might panic and sell at a low point. This will create a selling position for the fund to account for the requests of redemption, in turn bringing your profitability and performance down.

 

  • No Control Over Portfolio: Since you portfolio is managed by a professional, you are left with little or no control over your portfolio. And since you do not monitor the market mostly, you will have to depend on what your manager says.

 

  • Charges And Fees: When you redeem your money, you are charged in case of Mutual Funds. Addition to that, there are operating fees and transaction fees as well. So, you end up paying a lot.

 

When it comes to stock market you can’t count on guarantees, as there are none. You can never be sure of any stock and on the top of that Mutual Funds are made of many of them. But, in the field of investments, Mutual Funds are considerably less risky, if not safe.

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