Advantages and Dis-advantages of Mutual Funds

Advantages

Simplicity

 It is easy to invest in a mutual fund. They are widely available through mutual fund companies, brokers and financial planners. Even banks and insurance companies generally have their own mutual funds. The minimum investment is usually small - about $1,000 - $2,000. There is generally also a periodic purchase plan where as little as $100 per month can be automatically put into the investment directly from your bank account. Selling up is just as easy as buying into a fund.

Professional Management

 Full time investment managers theoretically have the experience and expertise to choose the best investments and the time to monitor them. There are some funds which continually out-perform most others. Often this advantage over other funds is due to the management. Professional management is one of the biggest advantages of the top performing funds.

Economy of scale

 Because mutual funds have large sums of money they can buy or sell large bundles of security in any one investment and thus reduce overall transaction costs.

Liquidity

 The share/units in mutual funds can be sold at any time at short notice.

Diversity

 Having large sums of money to invest a fund can have a wide range of investments across a wide range of investment sectors (industries). Much more so than individual investors with limited funds. So even if you only invest $1,000 you have a tiny investment in many companies. By yourself $1,000 would not be enough to invest in even one company.

Dis-advantages

Complexity of Costings

 Like any business, mutual funds are in the business of making profit. To make those profits, costs are incurred. These costs can severely reduce the fund's (net) profit. Unfortunately this whole industry seems to hide much of the cost under jargon and complexity.

Professional Management

 Just because fund managers have experience and expertise is no real guarantee of great performance. In fact, with most funds the manager still gets paid their fee even if the fund loses money.

Diversity dilution

 While diversification is a good thing in that it keeps you from having 'all your eggs in one basket' it can also reduce a fund's potential performance. When a fund has small holdings in many different investments, a superior performance in one particular investment will have little effect on the overall portfolio.

 Obviously this can be a positive for the fund if a particular investment has a serious loss.

Lack of Control

 You cannot pick your own investments. Some funds however might offer the choice of switching between various asset classes within the fund.

So what do you do?

 When you find a top performing fund the advantages can far out-weigh the dis- advantages because of the superior performance. But finding those top funds is the trick isn't it. When you find those funds and invest in them the advantages of offshore investing, particularly in mutual funds, become clear.

You are here:
Advantages - a discussion of the advantages and the disadvantages of these funds.

Mutual Funds - An explanation of what they are.

Mutual Fund Investing - How funds make money, how you make money from them, explanation of distributions and some special dates.

Offshore Investing Mutual Funds - an outline of why offshore funds beat all, and a bit about taxation.

Types of Mutual Fund - a listing and explanation of all the different types of funds onshore and offshore.

Offshore Investments - how to go about making your offshore investment through an offshore trust.

Understanding the Mutual Fund Prospectus - an explanation of some of the main things to look for when reading a prospectus.

Choosing a Mutual Fund - 6 important things to consider before making your decision to invest in a particular fund.

Compare Mutual Funds - how to analyze what the 1 year, 3 year, 5 year and 10 year returns mean, and how to compare funds with those figures.

Mutual Fund Managers - A very comprehensive list in alphabetical order of many of the managers of mutual fund families around the world.