The Advantages and Disadvantages of Investing in Mutual Funds

The Advantages and Disadvantages of Investing in Mutual Funds

Have you ever heard about mutual funds investment? For ordinary people, the term of mutual funds may still sound quite strange. What is it actually? Mutual fund id an alternative for people who have some limited capital (fund) to be invested through the Company’s Investment Manager. The funds collected by MI from the members with limited capital will be divided into several types of investments (stocks, bonds, and deposits) and not only in one company but several companies. Each mutual fund has several different investment objectives, according to the product type of the investment. A mutual fund is a practical choice for communities to invest in stocks even in several companies at once, but with a relatively small fund.

The Advantages of Investing in Mutual Funds

Perhaps, many people think why not purchase common shares directly on the stock exchange. There are several things that make mutual funds as an alternative investment that makes people feel interested in. A mutual fund can give benefit to investors in terms of investment monitoring at any time. It is the responsibility of investment manager entirely. The public can choose the type of mutual fund that can be tailored to the investment characteristics of each investor and also can adjust the level of return or reciprocal. The advantages of selecting mutual funds as an alternative investment are:

1. Managed by a Professional Management Team

Investment Manager is a professional management who has special expertise in fund management. His role is very important because he will serve those investors who only have limited time and cannot do research on the company and their investment directly in order to analyze the effects of price and information access to capital markets.

2. Transparency information

This type of investment clearly provides portfolio information development and costs continuously. This is done so that the Unit holder can monitor the benefits, costs, and risks all the time. As a mutual fund manager, he also must publish a net asset value every day in newspapers and publish annual financial statements and the prospectus is also performed regularly. With this information transparency, the investors can also regularly monitor the progress of their investment.

3. Investment Diversification Lowers the Risk that May Occur

A mutual fund is an investment that does not only focus on the investment of one company. This will obviously reduce the risks involved in such risk despite it cannot be eliminated. In other words, the existing risk is not concentrated in one type of investment but scattered. Keep in mind that there are two types of risk, namely the risk of gain and risk of loss. If your mutual fund puts the investment funds in 20 companies and 3 of them have the risk of loss, the investors do not need to worry because there is still a possibility in which other companies may not suffer from a loss risk but it can even experience gain risk.

4. Low Costs

A mutual fund is known as the set of many investors and professionally managed. In line with the magnitude of the ability to make this investment, then it will produce cost efficient transaction anyway. Transaction costs will be much lower compared to investors who invest directly in the stock exchange.

5. Safer

As already mentioned above that the risk level of the mutual fund is relatively low, then this clearly provide better security for investors compared to investments made individually and directly on the stock exchange. The money deposited is not held directly by the company but it is deposited in a special bank account, known as the custodian bank.

6. High Return Potential

A mutual fund is an investment alternative that the advantages can be enjoyed in the long term and is particularly suitable when used as an investment alternative that guarantees investors to prepare for retirement, preparing education fund, and various other long-term plans.

The Disadvantages of Investing in Mutual Funds

When talking about the risk, the mutual fund also has this risk where the value of the risk is obviously smaller than stock investment, but it is still bigger than other investments such as gold investment, product properties, product or deposits. Well, a few things that you need to pay attention concerning to mutual fund weaknesses are:

1. Impairment Net Assets Risk

This is caused by the price of investment instrument market which is lower than the initial purchase price. This price deterioration could be caused by many things such as the deteriorating stock market performance, the deteriorating of issuer performance, political and economic situation which are not stable, as well as a variety of other supporting factors.

2. Market risk

Market risk occurs when the price of investment instruments decreases due to lower stock market performance drastically.

3. Default Risk

This problem occurs when the investment manager buys bonds belonging to issuers who were experiencing financial difficulties whereas previously the company’s performance is still fine. As a result, the issuers were forced not to pay its obligations.

4. Liquidity Risk

This could be caused by the Participation Unit holder to withdraw funds in large quantities at the same time so that the investment manager experiences a rush. Usually, this occurs because of the sizeable negative factors such as political and economic situation worsens, there is closure or bankruptcy of several listed companies, even the liquidation of investment manager as a mutual fund manager.

Well, those are several advantages and disadvantages of investing in mutual funds. So, what are the solutions? Considering there are risks that could threaten your money in a mutual fund, there are several things to consider before deciding to make mutual funds as an investment option:

  • It is advisable to invest in mutual funds at least 3 years so that investors could enjoy a better return. If you want a return in less than 3 years, then you should choose other investment alternatives such as fixed income fund or the investment of deposits.
  • Do not forget to ask about costs that may arise from the product you want. Each product typically provides different charge rates ranging from 0-2%.
  • Most banks are agents of mutual funds, but not all products are available in the bank. Then, you as an investor should be able to choose the best mutual funds.