How Mutual Funds Compare to Other Investment Options

The first thing to understand about mutual funds is that they are pooled investments that are managed by a professional fund manager. The question arises in many people’s mind as to how mutual funds compare to other investment options.

Mutual funds are also known as managed funds and unit trusts. Whatever their name they all follow the same pooling concept. The main benefits of this pooling of funds is that investors can invest in a range of different assets with smaller sums of money. Because of this you are able to diversify a lot easier than investing directly into other investment options. The use of the pooled funds gives the managers access to markets that require very large cash deposits and this would not be possible for many individuals.

Mutual funds themselves invest in many asset classes and types of investment allowing you to invest into the other options without having to have too much investment knowledge — you let the managers do their job by looking after the funds. The managers have access to market information worldwide that you would not necessarily have access to. They are on the spot to make decisions.

When looking at other investments you do the decision making yourself, although you can have an adviser to make recommendations. You may or may not have expertise in the particular investment area. The option to invest directly gives you more personal control in what assets are included. However, you will undoubtedly require much larger amounts of money to gain true diversification. Of course diversification can be achieved using a combination of mutual funds and direct investment.

Many argue that mutual funds are expensive but there are varying options to choose from. Research the funds for their entry fees, MER (management expense ratio) and management fees. A fee based Financial Planner would normally rebate the entry fees as an entry fee does affect your investment at the outset. But if you were investing directly into shares there are brokerage fees for buying and selling whereas exit fees only normally apply to mutual funds that have not charged an entry fee. In the US no-load mutual funds are sometimes preferred because they do not come loaded with fees.

Other benefits of using a mutual fund compared to investing in other options is the liquidity aspect as the funds are usually able to be accessed within days. They are also ideal to use for drip feed investing whereas this is not usually possible with many other investments options. Due to tax changes over recent times New Zealand managed funds are more tax effective than direct investments.

Whether you invest in mutual funds, other investment options or a mix of both there are advantages and disadvantages of both and it is up to you to choose what suits you best…or speak with a Financial Planner to help you get it right.

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