From an investors' viewpoint mutual funds have several advantages such as:
- Professional management and research to select quality securities
- Spreading risk over a larger quantity of stock whereas the investor has limited to buy only a hand full of stocks. The investor is not putting all his eggs in one basket
- Ability to add funds at set amounts and smaller quantities such as $100 per month
- Ability to take advantage of the stock market which has generally out performed other investment in the long run
- Fund manager are able to buy securities in large quantities thus reducing brokerage fees
However there are some disadvantages with
mutual funds such as:
- The investor must rely on the integrity of the professional fund manager
- Fund management fees may be unreasonable for the services rendered
- The fund manager may not pass transaction savings to the investor
- The fund manager is not liable for poor judgment when the investor's fund loses value
- There may be too many transactions in the fund resulting in higher fee/cost to the investor - This is sometimes call "Churn and Earn"
- Prospectus and Annual report are hard to understand
- Investor may feel a lost of control of his investment dollars
- There may be restrictions on when and how an investor sells/redeems his mutual fund shares