Question

Explain three advantages and three disadvantages of investing in mutual funds rather than directly investing in assets such as stocks and bonds.

Answer 1

ADVANTAGES -

1) Risk Reduction - as most of the mutual funds invests in different type of securities depending on the character of the scheme opted by investor, it leads to diversification and works as safety measure for investor

2) Portfolio management - to manage the investment portfolio one has to hire professional portfolio manager who buys and sell stocks, bonds, etc. The price paid is relatively small for getting help in building advanced portfolio.

3) Dividend Reinvestment - dividend/interest paid by mutual funds can be reinvested in the mutual funds which helps in growing INVESTMENT

DISADVANTAGES -

1) Tax inefficiency - investor receives the distributions from the mutual funds that are generally uncontrollable tax events.

2) Management abuses - if the management is not ethical, it may window dress the financial statements which will lead to unnecessary trading, selling of the loss making stocks before year end to fix the books

3) Generally it can be observed most of the mutual funds comes with high expenses ratios and sales charges

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