Advantage and Disadvantage of Mutual Fund

Before going into the Mutual Fund investing, let us 1st weigh it’s advantages and disadvantages.

For me, I think the advantages offers by the mutual fund outweigh its disadvantages. If you want to make an investment but, you don’t have time to monitor the stock market performance. I will say that this investment is right for you.

Advantage of Mutual Fund

1. Diversification

You are provided with the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. Normally, the Fund Manager may invest the Fund in more than 10 companies.

2. Economies of Scale

Mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges. Imagine if you had to buy the 10-20 stocks needed for diversification. The commission charges alone would eat up a good chunk of your savings. Add to this the fact that you would have to pay more transaction fees every time you wanted to modify your portfolio – as you can see the costs begin to add up.

3. Liquidity

Another advantage of mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time without much difference between the sale price and the most current market value.

4. Professional Management

When you buy a mutual fund, you are also choosing a professional money manager. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund’s money manager to handle it for you.

5. Ability to participate in investments that may be available only to larger investors

In the Philippines, you can open a Mutual Fund account for a minimum initial investment of 5000php and a minimum additional investment of 1000php. If you are a small investor and you want to buy a stocks like PLDT (Ticker : TEL), you need at least 15,000php for 1 board lot. In mutual fund, the money of small investors was pooled together so they can purchase a high price stocks.

6. Government Oversight

The Mutual Fund companies in the Philippines are highly regulated by the SEC (Securities and Exchange Commision).

Disadvantage of Mutual Fund

1. Fees

There are 2 kinds of fees charged to the investor in subscribing and redeeming shares in mutual fund. The Entry Fee was charge when you buy a shares and the Exit Fee is charge when you redeem your shares before the holding period. There are some hidden fees in the Mutual Fund, so make sure you read and understand the prospectus of the Fund before investing.

2. Cash, Cash and More Cash

As you know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and that is not very advantageous.

3. Over Diversification

When investors acquire many funds that are highly related and, as a result, don’t get the risk reducing benefits of diversification. For example, several funds that invest only in a particular industry or region is still relatively risky.

4. Less predictable income

Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share.

Investment in Mutual Fund involves risk and the past yield are not indicative of future returns. Note that mutual fund investment is not the same as bank deposit and, was not covered by the PDIC.

Individual investor should know their investment horizon and their appetite for risk.

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source : Wikipedia and Investopedia