Mutual Funds are simply a group of individual stocks usually identified with a particular market segment (ie, US stocks, or European stocks, or Growth stocks, or Dividend stocks). In our opinion mutual fund investing is less risky than buying and selling individual stocks, because there is more diversification, but like individual stocks, mutual funds still trade in the publicly traded stock market which means these investments can also be very volatile in regards to the fluctuations of their day to day valuations.
Advantages of Mutual Funds very liquid (in and out immediately), daily valuations :
Disadvantages of Mutual Funds very volatile, direct exposure to global stock markets
Some additional comments about the publicly traded stock market, ie mutual funds, which creates some concerns investors need to be aware of. Most mutual funds have very high management fees that investors are paying to have their investments managed. The problem, in too many cases, is that the so called professional money managers cannot beat the basic performance of the stock markets to justify the fees being charged and, as such, management fees become a very high cost to your investment portfolio. With that said, there are many ways to have these management fees significantly reduced while having the same access to the market with the same type of investment products. Another concern about mutual funds is the love affair that most banks have with these products. I’m sure you too have experienced being at a bank and all they are suggesting as an investment choice is their own mutual fund products, without properly explaining the many different investment options available to an investor. In our opinion, like stocks, when investing in the publicly traded stock market, ie mutual funds, we “chase rates of return” at the expense of “protecting our investment capital” while most clients share our view that it is better to first “protect your investment capital” before “chasing rates of return”. Therefore, if we can better educate our clients about the investment marketplace, they are better equipped to make decisions about the utilization of mutual funds in our investment planning process.