Mutual Funds

Mutual Funds

If you’re a new investor looking for platforms with potential profits and minimum risks then let me introduce you to “Mutual Funds.” They are quite renowned in the investing world, reaping great benefits for many.  So what exactly are Mutual funds?

Simplified, mutual funds are professionally managed investments of varying sizes. The money for the investment comes from individuals and institutions to buy and sell securities such as stocks, bonds, precious metals, real estate, and even currencies and so on.

Let’s point out that, Mutual funds, like any other organization, are legally obligated to register with SEC, which is the Securities and Exchange Commission, and the fund manager must also be an RIA - A Registered Investment Advisor. The RIA operates the Mutual Funds, allocates its assets, and endeavors to achieve profits for the fund’s investors.

The investments that a Mutual Fund owns are called its “Portfolio” which has a specific structure and are strictly maintained in accordance with the “Investment Objectives” transcribed in the Prospectus. The mode of investment can be direct, where an investor can directly purchase a share from the Mutual Fund family, or it can be through a broker. Let’ look at why you should or shouldn’t invest in a Mutual Fund.

Why you should invest in a Mutual Fund

No Experience Required
Even if you have minimal to no experience in the investing world, mutual funds facilitate an average investor with professionally managed investments which would otherwise be too complex to manage single-handedly.

Varying Investment Size
You can invest small or large amounts of money in the fund.

Professional Managemet
Mutual funds, as compared to index funds enjoy professional management wherein complex matters are handled by industry professionals and RIAs.

Diversification and minimal loss
Mutual funds own securities varying through different asset classes and industry sectors, which gives investors diversification at a very low price. If the value, tied to only one asset class, or industry sector falls then each investor only loses a fraction of the whole amount.

Profit
Each shareholder participates in the gains of the fund proportionally.

Why you should not invest in a Mutual Fund

Additional Fees

Along with regular fees, investors are charged with loads, which are commissions on sales. When you access the mutual fund through brokers or brokerage companies they are paid through fees called load mutual funds.

Withdrawal Penalties
You may be penalized if you wish to withdraw before a certain time frame is completed.

Problems for exiting
There are strict rules and regulations forcing investors to stay long term before selling. Some advisors or brokers might also advise doing so even if it goes against the benefit of the shareholder.

Fund Manager is in control
An RIA or fund manager is in charge of all decisions pertaining to individual securities. Large fragments of mutual Funds are actively managed and buying/selling power lies in their hands.

Capital Gains distributed proportionally
Mutual funds always distribute capital gains to all shareholders equally regardless of how long you ’ve been in the ownership of the funds.

Unexpected Gains
When mutual funds need to raise cash, high-value investments are sold to distribute capital gains to investors, even though the fund has shown an overall bad performance. This, however, means that individual shareholder loses money on investment but is still liable to pay the tax.

These risks show that mutual funds might not be the best choice for you with several charges lined along the profits. However there are several other options you should browse for better returns with your investment like Index funds,  or ETFs -  Exchange-Traded Funds.