What are the pros and cons of investing in mutual funds?
On of the pros of investing in a mutual fund is first and foremost the ability to get broad diversification. With a small amount of money you can get a large number of securities. When you start looking at other markets, especially international markets, it is really not practical for an individual to buy international securities in foreign countries. A foreign mutual fund really gets you exposure to securities you wouldn't be able to get to on your own. Another advantage to mutual funds is that many people will look at is the professional management. You have a manager - or a management team - that is there really helping to implement the strategy. They are professional traders, people who earn a lot of money, but you as a individual aren't necessarily paying a lot to that person to manage the mutual fund because you are in that pooled strategy. The real risk associated, or the cons associated, with mutual fund investing is the lack of control that we have as investors. We make an assumption that these managers are good and are doing a really good job for us. Where we lack control for the most part is going to be in forced taxation through the selling of securities inside a mutual fund. That could potentially become a problem if a lot of investors in that mutual fund want their money back. That could force the managers to sell securities to give them back their money. This may be realization of capital gains which you as an investor who stays in that mutual fund is going to get stuck paying. You could actually be forced to pay taxes for transaction charges that are being generated by other investors.
