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.
Mutual Fund Fees Cover Administrative Costs. Mutual funds can offer streamlined investing but they’re not free. There are certain fees you have to be aware of when investing in mutual funds.
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Mutual Funds Have Hidden Fees. If fees were hidden, those hidden fees would certainly be on the list of disadvantages of mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees. While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the mutual fund prospectus and can be found on the mutual funds’ websites. Many mutual funds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual fund that does not charge the fee. Hidden fees cannot make the list of disadvantages of mutual funds because they are not hidden and there are thousands of mutual funds that do not charge 12b-1 fees.
Balanced Funds: Also called hybrid funds or asset allocation funds, these are mutual funds that invest in a balanced asset allocation of stocks, bonds, and cash. The allocation usually remains fixed and invests according to a stated investment objective or style. For example, Fidelity Balanced Fund (FBALX) has an approximate asset allocation of 65% stocks and 35% bonds. It considered a medium risk or what industry experts might call a moderate portfolio. Vanguard also has an outstanding index balanced fund, Vanguard Balanced Index (VBINX), which is suitable for investors looking for moderate risk. Balanced funds can be ideal for beginning investors because they are well-diversified and can, therefore, be used as stand-alone investments or as core holdings to begin a larger portfolio.
Mutual Funds and Poor Trade Execution. If you buy or sell a mutual fund, the transaction will take place at the close of the market regardless of the time you entered the order to buy or sell the mutual fund. I find the trading of mutual funds to be a simple, stress-free feature of the investment structure. However, many advocates and purveyors of ETFs will point out that you can trade throughout the day with ETFs. If you decide to invest in ETFs over mutual funds because your order can be filled at 3:50 pm EST with ETFs rather than receive prices as of 4:00 pm EST with mutual funds.