Question

1. What do you think the advantages of investing in mutual funds? Are there any disadvantages?
2. It is estimated that by the year 2014, household financial resources invested in mutual funds had reached more than 15 trillion dollars. Why do you think they’ve become so popular?
3. Since professional management and diversification are characteristics of mutual funds, must investors still evaluate a mutual fund? Why or why not?

Answer 1

Advantages of mutual fund

1) It provides diversification and reduces risk

2) Anyone can invest in mutual fund

3) Provides liquidity

4) Advanced portfolio management as the portfolio are managed by highly qualified and experienced analysts.

Disadvantage of mutual fund

1) High fees

2) poor trade execution

3) Tax inefficiency.

Mutual funds have become popular because it requires very small amount of money to invest in it and provides investment in diversified securities leading to risk reduction.

Although mutual funds provide diversification and professional management but it is subject to market risk which cannot be correctly forecasted all the time. So, the investors should be aware of it and not take for granted that there investment will always make profit. Only investors who are willing to take this risk should invest.