Mutual Funds: Should You Invest in It?
If statistics are
any indication, mutual funds are one of the most common investment vehicles
with more than half of American households taking a bite of this $11 trillion
dollar industry. But smart investors’ basic question remains: are mutual funds really
worth investing in?
Many market
experts and investors argue against investing the bulk of your hard-earned
money in this tax-inefficient and expensive investment vehicle. But still,
totally discounting the opportunities presented by mutual funds can be just as
stupid investment decision as jumping right in without fully understanding the
nature of the financial asset. In either case, we need to look thoroughly on
how mutual funds fare compared to other assets.
Minimum Requirements
If all you can spare
for your investments are loose change, you shouldn’t try your luck with mutual
funds since they usually impose minimum requirements of at least $2,500 to get
you started. Other investment vehicles, like ETFs for example will gladly take
your loose change since you can purchase as little as one share of this asset.
Trading
Mutual funds are
never designed for trading. Buying and selling are done at the end of the day
when the net asset value (NAV) of the fund is calculated. Compare this to other
investment vehicles like stocks and ETFs which you can buy or sell all throughout the trading hours, funds are
not the right tools for investors who like to watch every market movements and
time it for maximum profits.
Tax
Tax is one of
those inevitable costs of investing. To truly get a proper perspective on how
your investments fare, you need to look at the after tax returns of your
investment vehicles. In this aspect, mutual funds can be pretty taxing. You
have no control over capital gains taxes on mutual funds.
It works this
way: when hordes of investors decide to unload their fund holdings, the fund
manager has to sell assets in order to raise the capital to pay those
investors. As a result, you, being an investor of the fund, have to bear the
brunt of tax consequences. If you invest in stocks, however, you get to choose
to unload those shares when it is most beneficial for you in terms of taxes.
Risk
People who invest
in mutual funds probably thought it best to leave market analysis and timed
trading to the experts. Having your investment automatically diversified and
managed by a professional with a proven track record is one of the selling points
of mutual funds. However, that is not to say that investing in funds does not
have the risk inherent in all investment tools. Your investment is still
subject to market risks, ineffective fund managers, and other factors.
Returns
Despite the
decent returns posted by popular funds, they don’t necessarily outperform – at
least not, if you compare it to other investments classes. For example,
Vanguard’s funds may be a competitive choice when you compare to other funds in
the market. However, its ETF counterparts may prove to produce greater returns
at a fraction of the cost of its mutual fund.
There are
definitely some pros and cons in investing in different types of assets.
However, before you make any investment decision, you need to take inventory of
your investment goals and personality. If you want to take the passive approach
at investing, mutual funds can be the perfect vehicle for you. However, if you
wish to put on your investor hat and want to make decisions yourself, there are
better vehicles for you to try.
Article written by Azouz
from QuantShare trading software
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