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Mutual Funds: What you need to know

If we are asked what is the most popular investment choice in the U.S., the answer would be the mutual fund. From the word mutual, it means many investors share or pool funds that would then be used by the fund manager. The fund manager is the person who chooses which securities to invest in, and once it generates income, the returns are shared by the investors. Sounds easy, right? But before we jump the boat, let’s discuss the advantages and disadvantages of mutual fund.

Advantages:

  • Advanced Management and Convenience – Technically, anyone with money can buy a mutual fund then gain something from it. It’s easy because the pooled money is being handled by an experienced portfolio manager who is knowledgeable on which securities to invest on. You don’t have to personally manage it, you just pay a fee and the money will be returned with interest.
  • Safety or reduced risk – This is what makes mutual fund appealing. The portfolio manager divides the funds and invests on multiple securities on a single day lowering the risks of a full decline of the funds that he/she is managing.
  • Reinvestment of dividends – This means that the longer you leave your money to the portfolio manager, the bigger your investment becomes since any earnings are being used as part of the next investment.

Disadvantages:

  1. Sales charges and expense ratio – You have to be careful in choosing your fund manager. There are fund managers that do not have a sales charge, while most of them has it. Sales charge is applied whenever your investment returned with gains, lowering your net income. It is also said that the expenses and fees to hire a fund manager is on the higher side of things so you have to make sure you have more that enough investment so the cost of hiring a portfolio manager is negated by the returns of your investment.
  2. Tax inefficiency – Whether investors agree or disagree, mutual funds are being used by the fund manager and its earnings are taxable. This means that the earnings you get for mutual fund generates a tax event.
  3. Trade Execution – Here’s the thing, it doesn’t matter what time you put in your investment in a mutual fund, they only do trades at end of day and the earnings once the market is closed is finalized. This makes it impossible to take advantage of minute changes in the stock market.

For now, browse and click more on Prime Bright Investment Limited to know more about what we can offer for your financial needs.

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