Advantages and disadvantages of mutual funds

Advantages of mutual funds 

1. Diversification: When you invest in mutual funds, you get instant diversification since mutual funds are usually comprised of a large number of instruments such as stocks and bonds, across industries and regions. A diversified portfolio is generally considered less risky than owning individual stocks since you spread your risk. Investing in mutual funds can be a convenient way to increase your so-called risk-adjusted return.
   
   
2. Affordability and accessibility: Most mutual funds have low minimum investment requirements, making them an affordable and accessible investment option for people with varying levels of wealth. Mutual funds typically have lower fees and transaction costs compared to the costs associated with frequently buying and selling individual stocks, which can impact returns significantly over time. Investing in mutual funds gives you access to many instruments instantly.
   
   
3. Professional management: Investing in mutual funds helps you ensure constant, professional care of your portfolio. Mutual fund managers have the expertise and resources to evaluate companies and markets to make informed investment decisions. They monitor holdings and make adjustments to optimize performance and risk.
   
   
4. Broad selection: Mutual funds are offered by a wide range of issuers, providing clients with access to a variety of funds that may operate under similar mandates. This accessibility fosters competition within the industry, which can be beneficial for investors. Investing in mutual funds allows individuals to tap into a broad spectrum of investment opportunities, including niche asset classes that might otherwise be out of reach. These niche asset classes come with unique sources of potential returns, risks, and performance drivers, enhancing diversification throughout different economic cycles. This diversification enables investors to tailor their portfolios to better align with their preferences and needs.
   
   
5. Saves time: Investing in mutual funds can be a time-efficient strategy. Constructing a well-diversified portfolio demands significant expertise and time. It requires extensive experience and skills to research companies, monitor portfolios, and manage risk effectively. By investing in mutual funds, you leverage the expertise of professional fund managers who handle these tasks on your behalf, allowing you to benefit from their knowledge and experience without the need to invest your own time and effort. 

Disadvantages of mutual funds 

1. Lack of control: When you invest in mutual funds, you give up control and leave the decision to select, buy and sell specific stocks to the mutual fund manager, which may not always match with what you would prefer. No matter how you may feel about some of the holdings, you have no say in what this mutual fund invests in.
   
   
2. Lack of transparency: Mutual funds do not disclose their holdings and trading activity in real time. Generally, they report holdings on a delayed basis upwards of 60-90 days (sometimes even more!), so you won’t be able to see exactly how your money is being invested at any given time.
   
   
3. Order execution: In most markets, mutual funds are traded once a day after the market closes. This trading schedule limits investors’ ability to react quickly to significant market movements, as buy and sell orders are executed at the next available net asset value (NAV) calculated after the market’s close.
   
   
4. Underperformance: While mutual funds aim to optimize returns and manage risk, and are often promoted as professionally managed, there is no guarantee they will outperform the overall market or match the returns of a well-selected portfolio of individual stocks. Mutual fund managers, like any market participants, can make poor choices or miss opportunities at times. 
   

To gain a deeper understanding of mutual funds, please refer to our third chapter which provides an analysis of the main risks associated with mutual funds.