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.
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.
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Other Types of Mutual Funds: Index Funds. Today, not all funds are managed by a financial manager. Index funds use a computer program to buy all of the stock in a particular index, such as the Russell 3000 or the S&P 500, regardless of how they’re performing. They don’t have to do research or try to time the movement in the market to buy or sell at the ”right” time. Index fund fees, therefore, are generally much lower than the fees for managed funds, and, therefore, the return on investment is higher.
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.
Once you know your investment objective, which will include the number of years to invest and how much risk you’re willing to take, you can choose the best mutual fund or funds for you. And depending upon the types of mutual funds you use, the ongoing maintenance required may be little to nothing. Mutual Funds Offer Professional Management. One of the primary reasons investing mutual funds is easy is because they’re professionally managed. Rather than researching, analyzing, buying and selling stocks or bonds yourself, you have a skilled money manager doing it for you. Professional management is at the core of how mutual funds work: When investors buy shares of mutual funds, they’re pooling their money together. Managers use this pool of money to buy the stocks or bond securities that end up forming one portfolio.