In 1924 Mutual Funds were introduced in United States. Some years later, in 1930s Mutual Funds became part of the investment industry in Canada and today MFs are one the most popular and oldest investment products.
“A Mutual Fund, also know as MF, is a professionally managed investment scheme, where investors pool their money together to buy stocks, bonds and other forms of securities”
As an investor you are not concerned with any investment decisions, but rather, where you will initially invest your money and with whom of course. All of the growth and income generated by the fund is shared amongst the investors and on the flip side, if the MF fails, so will your investment.
Mutual Funds typically attract a lot of new investors who have yet to invest. MFs are also looked as the “bridge” product between safe investments, such as GICs and the more faster paced, yet exciting world of stocks. Mutual Funds are heavily promoted towards new investors, as a way to get into investing, learn more about investing and slowly move away from the typical savings account.
Advantages of Mutual Funds:
1. Managed by a Professional
2. Ability to participate in some high end investments (typically only available to larger investors)
3. Government Regulated
5. Option to redeem daily asset value
Disadvantages of Mutual Funds:
1. Someone else invests your money, meaning you have less say or customization
2. Fees (Managment Fees, Front End Load Fee (Sales Fee), Transaction Fees Etc.)
3. Not much control on timing of profit/loss
Since most Mutual Fund accounts can be opened with a little as $100, it’s not wonder that MFs are heavily advertised, promoted and easily accessible. Also many Mutual Fund companies offer pre-authorized purchase plans and automatic reinvestment of income. Furthermore, Mutual Funds are very easy to convert into cash, by simply redeeming your units. This can be done in less than 24hrs.
Even though MFs are popular, heavily advertised and promoted as a safe way, yet inexpensive way for “new” investors to get their feet wet with investing, there are many professional investors who will argue this case. Over the last fifty years, many different case studies have been done on Mutual Funds. Many will argue that the fees for investing in a Mutual Fund are ridiculous. Some will also argue that the money you invest is not properly invested, as a chunk of it is used to advertise and promote the fund, in hopes of bringing in new investors. Remember, the whole point of a Mutual Fund (from the perspective of the company) is to gain as many investors as possible, giving the fund manager(s) greater options as to where the money should be invested.
Like with anything, there are pros and cons. Fees are going to be there, no matter what. We pay banking fees for our savings to sit there, yet the bank is using your saving to invest it in other projects. If you want to avoid the fees or pay only minimal fees, you should look into Index Investing.