Mutual funds are one of the most popular investment vehicles among investors. Investors can purchase units in a mutual fund instead of buying individually from numerous companies. If you’re trying to decide if this is right for you, this article showcases the advantages and disadvantages of mutual funds.
Advantages and disadvantages of mutual funds
| Advantages | Disadvantages | |
| 1. | Advanced portfolio management | Management abuse |
| 2. | Risk reduction | High cost |
| 3. | Dividend reinvestment | Dilution of profits |
| 4. | Convenience | Ownership risk |
| 5. | Diversification | Market volatility |
Advantages of mutual funds
1. Advanced portfolio management
When you purchase mutual funds, you also pay a management fee. This fee is for professional portfolio managers who will be responsible for buying and selling various investments, i.e., stocks, bonds and other financial assets. These experts oversee the entire investment and take appropriate steps to effectively manage your portfolio.
2. Risk reduction
Most mutual funds invest in diverse types of investment assets; this reduces (or spreads) the risks that come with investing through adequate portfolio diversification. If you choose your mutual funds carefully, it is an excellent way to allocate your assets and balance out your risks.
3. Dividend reinvestment
Your investment compounds and grows faster when you reinvest your dividends. With mutual funds, you can always reinvest any profit the investment makes to purchase additional units. This process can also be automated which makes building wealth much easier.
4. Convenience
Mutual funds are not difficult to purchase. With Cowrywise, you can buy mutual funds units in under five minutes. Additionally, they are also easy to comprehend and usually have conservative, moderate to aggressive risk levels depending on your risk tolerance.
Find out your risk tolerance level by taking our risk assessment test.
5. Diversification
When you diversify within an asset class, you spread your investments across many companies within that asset class. This helps to reduce risk and leaves room for investment returns. Trying out diversification as an amateur investor can be tedious and complex, but this is where the professionals in mutual funds take the weight off you.
Disadvantages of mutual funds
1. Management abuses
Mutual funds are left to the hands of professional managers which can cause a portfolio manager to take advantage by window dressing. Window dressing is an approach used by managers of mutual funds or other types of portfolios to enhance the performance of a fund before presenting it to clients or shareholders.
To window dress, the fund manager can sell stocks that are performing poorly and purchase high-performing stocks near the end of the quarter or year. This is a deceptive way to present information on fund performance.
2. High cost
Some mutual funds have a high cost associated with them. This high cost consists of funds manager costs, distribution costs etc. The charges can also be significantly high depending on the fund. Additionally, some have an exit fee when investors leave the investment pool.
3. Dilution of profit
While diversification in mutual funds helps lower your risk, it may prevent you from making substantial gains. This is why investing in only some mutual funds is advisable. Mutual funds themselves come diversified, so too many diversities dilute your investments, and you get average returns.
4. Ownership risk
Owners of mutual funds are subject to ownership risks just like investors in other types of investments. Generally, funds’ value may decrease during a market downturn.
5. Market volatility
As with all investments, mutual funds are subject to market volatility and can offer returns that are lower than those of the broader market. However, what the fund invests in usually determines the risk and return levels.
How to purchase mutual funds
The three most popular ways to purchase a mutual fund are: directly from a fund provider, through an investment business, or through an online brokerage.
How to purchase mutual funds with Cowrywise
With Cowrywise, you can start investing from as low as N1000 for Naira mutual funds and $10 for Dollar mutual funds.
- Download the updated Cowrywise app here
- Create your account or sign in to your existing account.
- Tap “Invest”
- Then choose your preferred mutual funds option.
Bottom line
Mutual funds are an excellent option for both the beginner and expert investor, but this doesn’t mean they are perfect. Before investing, always ensure to ask the right questions. Being knowledgeable helps you make logical and informed decisions.
How can one monitor his investment in mutual fund to know the interest it has generated?