Pros and Cons of Investing in Mutual Funds

Pros and cons of investing in mutual funds need to be understood before you actually choose this investment instrument. Especially if you’re a beginner in investing, make sure you learn the advantages and disadvantages of each instrument. If you’re planning to invest in mutual funds, consider the following pros and cons to avoid unrealistic expectations.

The List of Pros and Cons of Investing in Mutual Funds

1. Easy to Buy and Understand

One of the reasons why you should consider mutual funds as an initial investment step is because of their simplicity. You can buy and understand how they work easily because they have low minimum investments. You don’t have to worry about fluctuations because the movements are not as sharp as when you invest in stocks.

2. Transparent and Have Clear Rules

Mutual fund investments are closely monitored by official institutions, one of which is called the SEC (Securities and Exchange Commission). This is what makes mutual funds considered a good and transparent investment instrument because investors can see all important information. You can study the contents of the portfolio to the information on fees charged.

You can even see and understand the performance or rise and fall of the fund value more easily. Financial reports and investment developments are definitely published regularly so that you feel safe during your investment. The rules are also clear with severe sanctions for those who commit fraud or deviations.

3. Guaranteed Safety Because of Diversification

Pros of mutual funds include greater security with reduced portfolio risk due to diversification. Mutual funds themselves are made up of many different securities so investors can diversify. This can be done depending on your focus and goals as an investor to minimize losses and stabilize investments.

An example of diversification in mutual fund investments is putting your money in bonds and technology stocks, for example. Or you can spread your money more widely across bonds, technology stocks, plus health stocks at the same time. This investment instrument is suitable for those of you who don’t want the hassle of choosing one by one.

Read More: 7 Helpful Tips to Diversify Portfolio Investment

4. Affordable Initial Capital

You don’t need to be rich and have a lot of money first just to invest in mutual funds. Even when you only have the amount of money to eat fast food, you can become an investor. You just need to find a platform making it easy for you to invest with small capital for mutual funds.

5. High Liquidity

Investing in mutual funds can be advantageous because of their high liquidity so money can be withdrawn at any time. This means you can sell any mutual fund and cash out quickly when you need the money fast. The process is very clear and very fast so that mutual funds are a favorite instrument for novice investors.

6. Lack of Real-Time Trading

Despite their high liquidity, mutual fund trade execution is quite poor, not suitable for those who want to move quickly. When you buy or sell a mutual fund, the transaction is not executed immediately (not real-time and can be delayed). For example, if you buy/sell a mutual fund at 10 am, the price isn’t the price at that time.

The price you get is the market closing price that day calculated after the closing time (usually in the afternoon). For day trading, mutual funds do not seem to be a good instrument because it’s less flexible than expected. If the timing is bad, you’ll actually lose instead of getting profit because the prices you get aren’t real-time.

7. Tax Exposure

What are pros and cons of investing in mutual funds should be known because it might include costly taxes. It means you can be taxed even if you don’t make a profit because of uncontrollable manager decisions. By being taxed, you automatically get tax deductions and your net investment profit is reduced.

8. Hidden Charges

Mutual fund investment isn’t always fun because there are often hidden costs that you aren’t aware of. It’s just that in the long run your investment results aren’t optimal and there are reductions that are detrimental. Beginners who focus on potential profits usually will not be aware of other costs that are charged.

Pros and cons of investing in mutual funds help you determine your investment goals as well as your risk profile. Avoid investment blindness by knowing each mutual fund’s advantages and disadvantages. Protect the funds you invest and also compare mutual funds with other investment instruments before starting.