Advantages and Disadvantages of Mutual Funds

Mutual funds are also sometimes known as open-end funds. These are portfolios of securities, mainly stocks, bonds and money market instruments. There are several important aspects of mutual funds. First, investors in mutual funds own a pro rata share of the overall portfolio. Second, the investment manager of the mutual fund actively manages the portfolio, that is, buys some securities and sells others. Third, the value or price of each share of the portfolio, called the net asset value (NAV), equals the market value of the portfolio minus the liabilities of the mutual fund divided by the number of shares owned by the mutual fund investors. Fourth, the NAV or price of the fund is determined only once each day, at the close of the day. For example, the NAV for a stock mutual fund is determines from the closing stock prices for the day. Fifth, and very importantly, all new investments into the fund and withdrawals from the fund during a day are priced at the closing NAV (investments after the end of the day or on a non-business day are priced at the next day’s closing NAV). 

The number of and assets in mutual funds grew significantly during the 1990s. At this time, there was a significant shift by individual investors from real estate and other tangible assets to financial assets. Discretionary financial assets increased from 34% in 1989 to 44%. Households increased their preference for indirect ownership through mutual funds over direct ownership of stocks and bonds. By the end of 1999, mutual funds accounted for 28% of household discretionary assets, up from 12% at the end of 1989. In addition, 85% of equity-owning households held a portion of their stocks in mutual funds in 1999, up from 50% in 1992. From 1990 to 1999, the number of mutual funds also rose, from approximately 2,900 to 8,000. According to the Investment Company Institute, the assets invested in mutual funds have increased significantly, from $134 billion to $6,846 billion in 1999.

Mutual funds must have a few advantages to which this significant growth can be attributed. They are:

Advantages of Mutual Funds: 

Diversification: