A mutual fund holds a set of securities such as stocks, bonds, commodities, real estate and/or cash instruments that is funded by the pooled investment of many purchasers. There are a number of advantages and disadvantages.
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- Diversified holding of many securities with one purchase. This gives you access to professional management and a level of diversification that would be difficult to create by direct purchase of these securities yourself.
- Reduces trading costs by only making one trade to purchase all the securities the fund holds. Some funds may be traded with no transaction fee (NTF). Which funds are NTF varies by brokerage.
- Many investment strategies available across the full spectrum of asset classes; from passive index funds to myriad active management strategies.
- Trades at the Net Asset Value (NAV) of the funds holdings at the end of each day. Unlike ETF’s and CEF’s you never will be buying the fund at a discount or premium to NAV
- Strict regulatory oversight
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- Can be hard to chose the strategy and fund that will best match your requirements
- Can be hard to chose a fund that has good long term performance. Research has repeatedly shown that most mutual funds underperform the market index
- Having to trade once per day at NAV means you lose the ability to trade at lows or highs that occur in the middle of the day
- There is a Expense Ratio which includes management fees, marketing, distribution and other costs. It is charged on a percentage of the value of the fund that you hold. The amount varies considerably by fund.
- Some funds have commission costs. There may be a sales load at purchase and/or when you sell. There may also be a 12b-1 fee which is and ongoing fee that is included in the Expense Ratio. These loads and fees may go to your financial advisor, your broker, your brokerage, or be split between them.