Mutual Funds for Dummy : Advantages and Disadvantages of Mutual Funds

Mutual funds are collections of stocks or bonds that are managed by an “investment professional.” Mutual funds cover the whole spectrum of investment possibilities – specific sectors, objectives, etc. These objectives are outlined in the mutual fund prospectus. The mutual fund investor purchases shares in the fund; the price of the fund varies daily according to its’ trading price – just like other publicly traded assets. Purchasing shares in the fund gives the investor a position in the fund.

The mutual fund shareholders pay an annual fee to an investment representative who buys and sells stocks for the fund. However, the prospective mutual fund investor must be careful in selecting a mutual fund. While they may advertise in being professionally managed, the truth is most mutual funds underperform average stock market returns. Another difficulty with mutual funds involves understanding the fees involved in owning shares in a mutual fund. Lots of “fine print” can be involved. It is very important to read the prospectus.

But if you do your research as you would with any other investment, there are good mutual funds out there worth your hard-earned dollars. Read the prospectus on the mutual fund and study how the fund has performed over the years. Make sure the fund has been around for a while so a good, lengthy track record can be established. The diversification within a well-managed mutual fund can guard against market adjustment periods. The real advantage the investor gets with a mutual fund is the level of expertise gained in the fund’s management. Seeking out funds that are actively managed and managed well is essential when researching mutual funds. Some of the best managed mutual funds are not run by the big investment companies, but by smaller firms. Another advantage in mutual fund ownership is the fact that transaction costs are lower due to the high volume buying and selling of shares involved. Minimum investment is also usually low, sometimes as low as $100.

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