Fri. Feb 21st, 2020

What are the Benefits and Risks of Mutual Funds

2 min read

Mutual funds are unique in that they offer professional management with inherent diversification. This is because, unlike most other investments, mutual funds are investment companies that operate independently. Therefore if you buy into one, you become a part owner of the company and its performance. This could be a huge boon for investors that perhaps feel uneasy formulating a portfolio entirely on their own.

Excess fees represent a definite downside of mutual funds. There are shareholder fees, commissions and annual operating expenses that can total 1% or more. Beyond this, frequent trades could further increase your costs, depending on the investment philosophy of the fund you select. Before you invest in any mutual fund, you should look over its prospectus to ensure that you are fully aware of all charges and policies.

Comparing Mutual Funds to Other Investments

Stocks come to mind when most people think of investing. But while many mutual funds are founded on stocks, investor-chosen individual equities can be much riskier. In fact, stocks often don’t become “safer” investments until you buy shares that are spread throughout the risk spectrum. This allows the possible losses incurred from high-risk stocks to be balanced by the smaller returns of more reliable choices. Mutual funds already accomplish this diversification, leaving less legwork for the investor, along with lower risk.

Similar to mutual funds, exchange-traded funds (ETFs) are built using widespread diversification across a certain investment type. There are equity ETFs, fixed-income ETFs, index ETFs and more. But unlike mutual fund companies, ETFs are available as individual investments directly through the market. So because they trade like stocks, ETFs allow investors to take a more active approach in where they invest their money. However, should you prefer to have investment professionals making those decisions for you, go with a mutual fund.

Mutual Funds: The Bottom Line

Investments typically don’t include internal professional management, but it’s an integral part of mutual funds. Although day-to-day trading decisions are out of your hands, the ability to choose a mutual fund with a strategy that you favor affords you some level of control. So no matter whether you’re a novice with little time to devote to trading or a bona fide expert, it might be worth seeing if mutual funds can improve your overall investment success.

Tips for Investing Newbies

  • f you’re new to investing, chances are you’re looking forward to the returns. But Uncle Sam is never far from the exchange of money, and investing is no exception. SmartAsset’s capital gains tax calculator can help you figure out what to expect.
  • Financial advisors customarily have years of experience investing client assets. This makes them great partners for anyone who’s new to building an investment portfolio. The SmartAsset financial advisor matching tool can pair you with up to three advisors in your area. Take a few minutes to answer the questionnaire within to the tool to ensure that you receive the best matches.

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