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.
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.
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 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.
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.
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