Mutual Funds are Professionally Managed. Many investors don’t have the resources or the time to buy individual stocks. This is where professional management is valuable. Investing in individual securities, such as stocks, not only takes resources but a considerable amount of time. By contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund.
Think of mutual funds as investment baskets of securities. Each basket has its own objective and manager (or management team). The manager also has a team of analysts that assist in doing the research. Also keep in mind that, when it comes to management, mutual funds fall into two primary categories — one is active management and the other is passive management. Managers of actively-managed funds will use their resources to try and ”beat the market,” which is to say that they’ll attempt to outperform a certain benchmark, such as the S&P 500 index. However, the manager of a passively-managed mutual fund will not try to beat the index but will instead buy and hold a basket of stocks that will replicate the holdings and performance of the index.
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.
Mutual Funds Lack Liquidity. How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and closed-end funds? If you sell a mutual fund, you have access to your cash the day after the sale. ETFs, stocks and closed-end funds require you to wait three days after you sell the investment. I would call the “lack of liquidity” disadvantage of mutual funds a myth. You can only find more liquidity if you invest in your mattress.
Investors Can Buy Many Different Types of Mutual Funds. Investment objectives are unique to every investor, which means that there are many different reasons to buy mutual funds. Fortunately, there are several categories of funds that can suit any investment need. Some of the most common investment objectives include retirement and education, each of which may require different funds to suit the needs of the investor. Target retirement funds are good examples of low-cost, diversified funds tailored to meet a variety of time horizons. This category of funds will invest in other mutual funds that combine to be suitable for a certain age range of investor. Target retirement funds are categorized by decade. For example, a 25-year old investor may expect to retire in 35 to 45 years. Therefore a fund like Vanguard Target Retirement 2050 (VFIFX) can work well in a 401(k) or IRA for this investor.