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What Is a Mutual Fund? The Pros and Cons

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Mutual FundsThere are many ways to make money in this world.  One vehicle people choose to use is playing the stock market.  The stock market can be a very good place to make good returns on your investments with little work or knowledge required.  Sure, stocks can get as complex as you want them to get, but you need not be an expert to do do well.

One great way to have your hand in the stock market, without knowing much about it, is by using mutual funds. Mutual funds are managed funds that are comprised of several different stocks and bonds to make up a specific sector of the market.  This sector could be technology, energy, emerging markets, financials or others.  There are risks involved in investing money in the stock market, but over time, good investments can be very profitable.

Many people use mutual funds for their retirement accounts like an IRA or 401K.  Reasons being, they are usually less risky and can do well over a long period of time.  Lets break down mutual funds and discuss some of the Pros and Cons.

PROS

Professionally Managed- Mutual funds are managed by trained professionals who are kept up to date of market conditions and moving trends.  This enables people who may not have a lot of knowledge in the stock market to let a professional help manage their portfolio.

Low Transaction Costs- When trading stocks by themselves, it can become very costly when you factor in commission costs.  By trading mutual funds, you are able to incorporate several different stocks and bonds with a minimal transaction fee.

Less Risky- Using mutual funds usually are less risky, because they diversify your investments among a variety of different equities.  As a result, usually mutual funds returns are moderate compared to singular stocks or more aggressive positions, but returns for mutual funds can still be strong.

Liquidity- As are stocks, mutual funds are very liquid.  Usually you can liquidate your funds from open-ended mutual funds within a couple days of requesting them.  This allows you to have access to your funds relatively quickly, unlike a real estate investment or joint venture.

CONS

Expesnse Fees- Although your transaction costs are down with mutual funds, sometimes you can get pulled into large expenses and management fees for your funds.  These differ depending on the fund, but sometimes much of your profits can be eaten up by a fund management fee.

Lower Returns- As I noted early, because of the diversification of mutual funds, usually your returns are a lot smaller than if you were to have a more aggressive portfolio.  This can be an advantage during a down time in the market, but can also leave money on the table during an up market.

Little Control- In a mutual fund you maintain little control to what you buy or sell or when you choose to cash out.  It can be difficult when trying to plan tax strategies since in most cases mutual funds distribute most of their capital gains and dividends to shareholders at the end of the year.  If you try and plan for taxes, this can sometimes cause some problems.

So there they are.  Mutual funds can be a great place for funds, especially in retirement accounts.  I like to use tools like Morningstar Investment Research. Morningstar can be a great resource as they have their own mutual fund rating system that shows the funds expense fees as well as their historical gains.  Mutual funds can assist you in achieving success.

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