In a mutual fund, the value of your shares goes up and down as the value of the stocks and bonds in the fund rise and fall. For the average investor to have the same exposure to those investment options and potential profits on their own would be extremely costly both in terms of the actual investment dollars and in terms of time. Additionally, investing in a mutual fund is generally a cost-effective way to gain access to professional money management. Were you to try and invest in individual securities and actively manage them the way a mutual fund’s manager does, it could very easily become a full-time job. In order to make wise investment decisions when you buy individual stocks and bonds yourself, at the very least you’d have to have the knowledge to do extensive research on various types of businesses in general (automobile, construction, medical) and on specific companies (GE, IBM, Microsoft).
Mutual Funds Have High Sales Charges. Should a sales charge be included in the disadvantages of mutual funds list? It’s difficult to justify paying a sales charge when you have a plethora of no-load mutual funds. But, then again, it’s difficult to say that a sales charge is a disadvantage of mutual funds when you have thousands of mutual fund options that do not have sales charges. Sales charges are too broad to be included on my list of disadvantages of mutual funds.
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That said, a “no-load” fund is not free. All mutual funds have internal expenses. Part of your investment dollars will help pay the fund company, the fund manager, and other fees associated with running a mutual fund. These fees will often be made transparent to you and are taken out of the assets of the mutual fund. You should always take the time to consider all the various fees and charges when investing in mutual funds.
Avoiding the Dave Ramsey Mistake
Choose Wisely When choosing mutual funds for your portfolio, do your homework. Review each fund’s fees and individual asset allocation to make sure you’re choosing a fund that fits your investment goals and risk tolerance. Also, consider a fund’s performance. While past history doesn’t guarantee future results, it’s also wide to look at how much a fund has gained or lost in the past.