Mutual funds are managed investments that diversify a large pool of investor’s money into a number of investment vehicles. There are advantages and disadvantages to investing in mutual funds, and these pertain in part to investment risk, yield, opportunity cost, fees, and financial planning. This article will outline some these pros and cons of mutual fund investing in addition to giving examples of various types of mutual funds.
TYPES OF MUTUAL FUNDS AVAILABLE:
When it comes to mutual funds there are a sizable number of choices to choose from. Some mutual funds specialize in emerging markets, others specialize in commodities, some in stocks and bonds and so on. The historical performance of a mutual fund varies from fund to fund. Additionally, different fund managers may use different investments strategies and styles for similar types of mutual funds. Thus, the fund management is also a relevant factor in how a mutual fund will do. Some examples of mutual funds are illustrated below to demonstrate the wide range of investments a mutual fund can make possible that may not otherwise be possible via investment alternatives.
• Fidelity ContraFund (FCNTX): Invests in large capitalization companies
• ProFund Ultra Short Japan Inv (UKPIX): A mutual fund that invests on a decline in Japan’s financial markets
• Dreyfus Premier Emerging Mkts Opp 1 (SEORX): Specializes in large capitalization emerging markets
•PIMCO Commodity Real Return Strategy Fund (PCRAX): A mutual fund focused on commodities investments, specifically natural resources.
• Summit Nasdaq 100 Index 1 (SANIX): A fund that invests in the 100 largest NASDAQ stock exchanges companies
RISK, FEES, AND YIELD OF MUTUAL FUNDS:
Fees associated with mutual funds can also vary. A mutual fund may be a no load, front end or back end mutual fund in addition to having annual maintenance fees which vary among funds. No load funds do not charge fees for certain requested by the mutual fund owner such as buying and selling of the mutual fund. Front-end mutual funds charge a fee and/or commission upon purchase but not upon sale whereas back end mutual funds do the reverse. Assessing the scale and amount of mutual fund management fees and charges in relation to their cost and percentage yield is an important calculation to consider when choosing mutual funds.
Mutual funds are generally a lower risk choice of investment than direct investment in options, commodities and some types stock investing. This is primarily due to 1) the professional management of the fund and 2) the diversification of risk over a number of investments. These two factors can make mutual funds a useful part of an individual, estate or business investment strategy as it hedges against risk. However, investing solely in mutual funds may also create risk because mutual funds are not entirely immune from investment risk and may not guarantee returns or value of initial investment.
ALTERNATIVES TO MUTUAL FUNDS:
Alternatives to mutual funds include Exchange Traded Funds (ETF), Unit Investment Trusts (UIT), Treasury Inflation Protected Securities (TIPS), Real Estate Investment Trusts (REIT) and Certificates of Deposit (CD) among several other options be it via investment in physical property, business or asset classes such as art, antiques, or vehicles. In other words, the number of choices an investor has is broad, and mutual funds represent only a fraction of the available choices. Consequently, being able to weigh the advantages and disadvantages of one investment over another is essential for investment success, risk level and investment goals. How well a mutual find is capitalized i.e. its size and capacity to invest, the performance of the companies and/or financial products the fund invests in, and the tax implications or lack thereof on investing through certain funds can all be relevant when choosing to invest in a mutual fund.