vidual with the opportunity to focus his money in the desired industry or sector, and spread his investments in the various companies in that industry or sector. The diversification of investments allows investors to reduce the risk of their respective investments.
Another important advantage of mutual funds is liquidity. One can redeem mutual fund shares on any day at the funds net asset value per share. Another benefit is that an investor would not pay any commissions or other fees upon redemption of the mutual fund. It is only when an investor owns certain classes of shares that he may be required to pay a deferred sales charge if the shares were not held for a specified period of time. As a way to reduce the negative effects of short-term trading in mutual fund shares, mutual funds have implemented redemption fees if shares are held for less than a specified period of time. The deferred sales charges and redemption fees increase the cost associated with redemptions. (Braham, 2007)
Mutual funds enable investors to avail of the services of a professional asset management. A mutual fund is managed by a professional manager, who initiates and leads investment decisions on behalf of the fund. The portfolio manager is assisted by competent analysts who conduct research on market conditions, industries and individual companies. Small investors would not be able to avail of the services of a professional fund manager outside of a mutual fund.
A mutual fund is easy to manage as investors are continually purchasing and redeeming shares of the fund. Mutual funds offer intra-day pricing which helps investors get a good price for their shares at the end of the day.
Before investing in a mutual fund, there are several caveats one must observe. First, determine how the fund impacts one’s tax bill.The law requires a mutual fund to make a capital gains distribution to shareholders if it sells a security for a profit that cant be offset by a loss.