The Advantages & Disadvantages of Mutual Fund Investment

Sep 29, 2010
Carol Finch

The Pros & Cons of Mutual Fund Investment - Photo by dlnny

Investing in a mutual fund as part of retirement planning comes with pros & cons. What are the advantages & disadvantages of mutual fund investment?

Investing in mutual funds is a common way to save for later life. Those looking to buy into a fund may want to consider potential benefits and drawbacks before choosing this as a way of building income. What are the advantages and disadvantages of mutual fund investment?

The Advantages of Mutual Fund Investment

Mutual funds allow an investor to tap into the kind of large-scale investment that may not be possible on an individual basis. Here, people effectively get more buying power as their cash is pooled together. There are various benefits to buying into a fund. These include:

Risk: Pooling smaller investments into a greater whole allows a fund manager to invest with greater diversification. An individual managing a portfolio may not have enough cash to do this. Getting a broader spread can help reduce risk.
Investment cost and access: Individuals can invest relatively low amounts in mutual funds. This, again, allows them to benefit from diversification at a lower cost than with other investments. They can also opt to take their money out of a fund if they wish.
Specialist fund management: Having a fund manager to take control of investments may make it easier for people to invest in the first place. An individual needs no knowledge of where, how and when to buy and sell as this is managed for them.
Choice: With so many different types of fund to choose from, the individual can tailor their investment according to financial needs and preferences. Those that are risk-averse can opt for safer funds; those that are prepared to take greater risks have their own options. It may also be easy to switch between different types of funds over time to take account of market conditions or changes in individual circumstance.

Mutual fund investment may come with attractive benefits but there are also downsides. It is important to consider both sides before reaching a decision.

The Disadvantages of Mutual Fund Investment

Like any other investment, mutual funds come with some disadvantages that may make them a less effective solution. For example, it is worth considering:

Investment returns: There are no guarantees of returns and profits/losses depend on variables such as stock market performance and fund management capabilities.
Investor choice: Some investors do not choose the right fund for their needs. Investing in long-term growth funds, for example, may not be cost-effective for those with short-term needs. A high-risk product may not suit those that need more security of return.
Fund management: A good fund manager may get effective returns but a mediocre or bad one may not. There are also no guarantees that original management will stay in place for the life of an investment or that a high-performing specialist will always perform well.
Fees and costs: Buying into a mutual fund will cost money. Some funds will charge loading fees at the investment and/or withdrawal stages which can reduce invested cash or returns. All will charge annual operating fees.
Loss protection: Mutual funds are not protected by the Federal Deposit Insurance Corporation (FDIC) so there are no guarantees of having money returned if problems occur.
Access: Although being able to take money out of a mutual fund investment can be seen as an advantage, this may also work as a negative. Cashing in early or at the wrong stage could see the investor reduce returns and incur charges.

Those considering mutual fund investment may find it useful to assess the pros and cons before deciding whether this is a good option to take. Learning more about how these funds work and how to make the right product choice may take them one step closer to finding the right solution.