Advantages and disadvantages to investors
Mutual funds have advantages and disadvantages compared to investing directly in individual securities:
- Increased diversification: A fund diversifies holding many securities. This diversification decreases risk.
- Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund’s holdings. Most funds allow investors to redeem in this way at the close of every trading day.
- Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund’s investments.
- Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.
- Service and convenience: Funds often provide services such as check writing.
- Government oversight: Mutual funds are regulated by a governmental body.
- Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.
Mutual funds have disadvantages as well, which include:
- Less control over timing of recognition of gains
- Less predictable income
- No opportunity to customize