Why Mutual Fund?

Pros

It may not be obvious at first why you would want to purchase shares in different securities through a mutual fund "middleman" instead of simply purchasing the securities on your own. The mutual funds offer notable benefits to investors.

Ø      All Eggs in one basket:

The mutual funds give you ability to diversify in number of assets with limited capital. With a mutual fund you can diversify your holdings both across companies (e.g. by buying a mutual fund that owns stock in 100 different companies) and across asset classes (e.g. by buying a mutual fund that owns stocks, bonds, and other securities). When some assets are falling in price, others are likely to be rising, so diversification results in less risk than if you purchased just one or two investments.

Ø      Funds Galore:

Mutual funds are available in several styles and types. Balanced funds, bond funds, money market mutual funds, stock funds, and target-date mutual funds are different types of mutual funds available. There are thousands of funds, and each has its own objectives and focus. The key is for you to find the mutual funds that most closely match your own particular investment objectives.

Ø      Mutual Funds are liquid assets:

Liquidity is the ease with which you can convert your assets--with relatively low depreciation in value--into cash. In the case of mutual funds, it's as easy to sell a share of a mutual fund as it is to sell a share of stock

Ø      No Large upfront investments:

Most mutual funds will allow you to buy into the fund with as little $1,000 or $2,000, and some funds even allow a "no minimum" initial investment, if you agree to make regular monthly contributions of $50 or $100. Whatever the case may be, you do not need to be exceptionally wealthy in order to invest in a mutual fund.

Ø      Systematic Investing and Additional Services:
It is easy to invest frequently in a mutual fund. Several mutual fund firms lets their investors to invest money as low as USD 100/month to their mutual fund. Your amount can be withdrawn directly from your bank account and then deposited to your mutual fund. It will work the other way around as well, money from mutual fund can also be transferred to your bank account. This service comes at free of cost. Some mutual funds offer additional services to their shareholders, such as tax reports, reinvestment programs, and automatic withdrawal and contribution plans. 

Ø      Low Transaction Costs:

Mutual funds are able to keep transaction costs -- that is, the costs associated with buying and selling securities -- at a minimum because they benefit from reduced brokerage commissions for buying and selling large quantities of investments at a single time.

Ø       Regulation:

Mutual fund managers can't take your money and head for some remote island somewhere. Thanks to the Investment Company Act of 1940 (often called "the '40 Act"), your mutual fund is a regulated investment company (regulated by the Securities & Exchange Commission) and you, as a mutual fund investor, are an owner of that company.

Ø Professional Management:

While mutual fund investors should have a basic understanding of how the stock and bond markets work, you pay your fund managers to select individual securities for you. You don’t need in-depth financial knowledge to invest in Mutual Funds. Mutual funds are managed by a team of professionals, which usually includes one mutual fund manager and several analysts. Presumably, professionals have more experience, knowledge, and information than the average investor when it comes to deciding which securities to buy and sell

Cons

Still, mutual funds are not fairy-tale investments. As you will learn in later sessions, some funds are expensive and others perform poorly. You should also be aware of the drawbacks associated with mutual funds.

Ø    No Insurance:

Mutual funds, although regulated by the government, are not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that you could even lose your entire investment.

Ø      Dilution:

Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly. 

Ø    Fees and Expenses:

Most mutual funds charge management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell.

Ø       Poor Performance: Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now question whether or not professional money managers have better stock-picking capabilities than the average investor. 

Ø      Loss of Control:

The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you. You also should remember that you are trusting someone else with your money when you invest in a mutual fund. 

Ø     Trading Limitations:

Although mutual funds are highly liquid in general, most mutual funds (called open-ended funds) cannot be bought or sold in the middle of the trading day. You can only buy and sell them at the end of the day, after they've calculated the current value of their holdings. 

Ø      Size:

Some mutual funds are too big to find enough good investments. Larger the fund less nimbe it is, This is especially true of funds that focus on small companies, given that there are strict rules about how much of a single company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a result, the fund might be forced to lower its standards when selecting companies to invest in. 

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