Why Invest in Mutual Funds?

So why invest in mutual funds? Some of the advantages are:

1. Diversification - By owning shares in a group of stocks or bonds instead of owning individual stocks or bonds, your risk is spread out.
2. Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.
   
3. Professionally managed - basically, leave it to the experts!
   
4. Highly liquid - You can buy and sell mutual funds anytime and recover the funds quickly
5. Simplicity - Funds can be easily purchased from banks or mutual fund agents
6. Security - The interests of unit holders are protected by the appointment of an independent trustee to hold the fund's assets on behalf of the unit holders

However, despite the above advantages, there are also common pitfalls which you need to be aware of, such as:

1. Don't always assume the funds are professionally run! Some fund manager has the tendency to deviate from the funds objectives and invest in unappropriate stocks. So always check out the level of experience of their fund managers, their investment portfolio(whether matches the fund's objectives) and their historical track record before buying!
2. Costs are often factored into the fund's price, it may not be transparent for investors! Some funds come with high sales charges or management fees that render positive investment return very difficult! So always check out the cost of charges! It may be worthwhile to buy funds that offer free units or lower sales charges.
   
3. For most funds e.g, equity funds, their investment objectives are often to outperform the equity index. So during market downturn, it is often "acceptable" for fund managers to make a loss or negative return as long as the fund's performance outperforms the equity index! To me, this is not acceptable as this is not acting in the best interest of investors.
   

As always, analyze the fund first before making the decision to buy!