Advantages and disadvantages to investors

Mutual funds have advantages and disadvantages compared to investing directly in individual securities:

Advantages

  • Increased diversification: A fund diversifies holding many securities; this diversification decreases risk.
  • Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund’s holdings. Most funds allow investors to redeem in this way at the close of every trading day.
  • Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund’s investments.
  • Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.
  • Service and convenience: Funds often provide services such as check writing.
  • Government oversight: Mutual funds are regulated by a governmental body
  • Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare[7]

Disadvantages

Mutual funds have disadvantages as well, which include:

  • Fees
  • Less control over timing of recognition of gains
  • Less predictable income
  • No opportunity to customize[8]
Categories: Knowledge

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