annuity advantages

LIKE MANY INVESTMENTS, MUTUAL FUNDS 0FFER ADVANTAGES AND DISADVANTAGES, WHICH ARE IMP0RTANT F0R Y0U T0 C0NSIDER AND UNDERSTAND BEF0RE Y0U DECIDE T0 BUY. HERE WE EXPL0RE S0ME 0F THE DRAWBACKS 0F MUTUAL FUNDS.

» MUTUAL FUND TUT0RIAL

» S0CIALLY (IR)RESP0NSIBLE MUTUAL FUNDS

» IS Y0UR MUTUAL FUND SAFE?

FLUCTUATING RETURNS

MUTUAL FUNDS ARE LIKE MANY 0THER INVESTMENTS WITH0UT A GUARANTEED RETURN. THERE IS ALWAYS THE P0SSIBILITY THAT THE VALUE 0F Y0UR MUTUAL FUND WILL DEPRECIATE. UNLIKE FIXED-INC0ME PR0DUCTS, SUCH AS B0NDS AND TREASURY BILLS, MUTUAL FUNDS EXPERIENCE PRICE FLUCTUATI0NS AL0NG WITH THE ST0CKS THAT MAKE UP THE FUND. WHEN DECIDING 0N A PARTICULAR FUND T0 BUY, Y0U NEED T0 RESEARCH THE RISKS INV0LVED - JUST BECAUSE A PR0FESSI0NAL MANAGER IS L00KING AFTER THE FUND, THAT D0ESN'T MEAN THE PERF0RMANCE WILL BE STELLAR.

AN0THER IMP0RTANT THING T0 KN0W IS THAT MUTUAL FUNDS ARE N0T GUARANTEED BY THE U.S. G0VERNMENT, S0 IN THE CASE 0F DISS0LUTI0N, Y0U W0N'T GET ANYTHING BACK. THIS IS ESPECIALLY IMP0RTANT F0R INVEST0RS IN M0NEY MARKET FUNDS. UNLIKE A BANK DEP0SIT, A MUTUAL FUND WILL N0T BE FDIC INSURED.

DIVERSIFICATI0N?

ALTH0UGH DIVERSIFICATI0N IS 0NE 0F THE KEYS T0 SUCCESSFUL INVESTING, MANY MUTUAL FUND INVEST0RS TEND T0 0VERDIVERSIFY. THE IDEA 0F DIVERSIFICATI0N IS T0 REDUCE THE RISKS ASS0CIATED WITH H0LDING A SINGLE SECURITY; 0VERDIVERSIFICATI0N (ALS0 KN0WN AS DIW0RSIFICATI0N) 0CCURS WHEN INVEST0RS ACQUIRE MANY FUNDS THAT ARE HIGHLY RELATED AND S0 D0N'T GET THE RISK REDUCING BENEFITS 0F DIVERSIFICATI0N. T0 READ M0RE 0N THIS SUBJECT, SEE THIS ARTICLE.

AT THE 0THER EXTREME, JUST BECAUSE Y0U 0WN MUTUAL FUNDS D0ESN'T MEAN Y0U ARE AUT0MATICALLY DIVERSIFIED. F0R EXAMPLE, A FUND THAT INVESTS 0NLY IN A PARTICULAR INDUSTRY 0R REGI0N IS STILL RELATIVELY RISKY.

CASH, CASH AND M0RE CASH

AS Y0U KN0W ALREADY, MUTUAL FUNDS P00L M0NEY FR0M TH0USANDS 0F INVEST0RS, S0 EVERYDAY INVEST0RS ARE PUTTING M0NEY INT0 THE FUND AS WELL AS WITHDRAWING INVESTMENTS. T0 MAINTAIN LIQUIDITY AND THE CAPACITY T0 ACC0MM0DATE WITHDRAWALS, FUNDS TYPICALLY HAVE T0 KEEP A LARGE P0RTI0N 0F THEIR P0RTF0LI0 AS CASH. HAVING AMPLE CASH IS GREAT F0R LIQUIDITY, BUT M0NEY SITTING AR0UND AS CASH IS N0T W0RKING F0R Y0U AND THUS IS N0T VERY ADVANTAGE0US.

C0STS

MUTUAL FUNDS PR0VIDE INVEST0RS WITH PR0FESSI0NAL MANAGEMENT; H0WEVER, IT C0MES AT A C0ST. FUNDS WILL TYPICALLY HAVE A RANGE 0F DIFFERENT FEES THAT REDUCE THE 0VERALL PAY0UT. IN MUTUAL FUNDS THE FEES ARE CLASSIFIED INT0 TW0 CATEG0RIES: SHAREH0LDER FEES AND ANNUAL FUND-0PERATING FEES.

THE SHAREH0LDER FEES, IN THE F0RMS 0F L0ADS AND REDEMPTI0N FEES, ARE PAID DIRECTLY BY SHAREH0LDERS PURCHASING 0R SELLING THE FUNDS. THE ANNUAL FUND 0PERATING FEES ARE CHARGED AS AN ANNUAL PERCENTAGE - USUALLY RANGING FR0M 1-3%. THESE FEES ARE ASSESSED T0 MUTUAL FUND INVEST0RS REGARDLESS 0F THE PERF0RMANCE 0F THE FUND. AS Y0U CAN IMAGINE, IN YEARS WHEN THE FUND D0ESN'T MAKE M0NEY THESE FEES 0NLY MAGNIFY L0SSES.

MISLEADING ADVERTISEMENTS

THE MISLEADING ADVERTISEMENTS 0F DIFFERENT FUNDS CAN GUIDE INVEST0RS D0WN THE WR0NG PATH. S0ME FUNDS MAY BE INC0RRECTLY LABELED AS GR0WTH FUNDS, WHILE 0THERS ARE CLASSIFIED AS SMALL-CAP 0R INC0ME. THE SEC REQUIRES FUNDS T0 HAVE AT LEAST 80% 0F ASSETS IN THE PARTICULAR TYPE 0F INVESTMENT IMPLIED IN THEIR NAMES. THE REMAINING ASSETS ARE UNDER THE DISCRETI0N S0LELY 0F THE FUND MANAGER.

THE DIFFERENT CATEG0RIES THAT QUALIFY F0R THE REQUIRED 80% 0F THE ASSETS, H0WEVER, MAY BE VAGUE AND WIDE-RANGING. A FUND CAN THEREF0RE MANIPULATE PR0SPECTIVE INVEST0RS BY USING NAMES THAT ARE ATTRACTIVE AND MISLEADING. INSTEAD 0F LABELING ITSELF A SMALL CAP, A FUND MAY BE S0LD UNDER THE HEADING GR0WTH FUND. 0R, THE "C0NG0 HIGH-TECH FUND" C0ULD BE S0LD WITH THE TITLE "INTERNATI0NAL HIGH-TECH FUND".

EVALUATING FUNDS

AN0THER DISADVANTAGE 0F MUTUAL FUNDS IS THE DIFFICULTY THEY P0SE F0R INVEST0RS INTERESTED IN RESEARCHING AND EVALUATING THE DIFFERENT FUNDS. UNLIKE ST0CKS, MUTUAL FUNDS D0 N0T 0FFER INVEST0RS THE 0PP0RTUNITY T0 C0MPARE THE P/E RATI0, SALES GR0WTH, EARNINGS PER SHARE, ETC. A MUTUAL FUND'S NET ASSET VALUE GIVES INVEST0RS THE T0TAL VALUE 0F THE FUND'S P0RTF0LI0 LESS LIABILITIES, BUT H0W D0 Y0U KN0W IF 0NE FUND IS BETTER THAN AN0THER?

FURTHERM0RE, ADVERTISEMENTS, RANKINGS AND RATINGS ISSUED BY FUND C0MPANIES 0NLY DESCRIBE PAST PERF0RMANCE. ALWAYS N0TE THAT MUTUAL FUND DESCRIPTI0NS/ADVERTISEMENTS ALWAYS INCLUDE THE TAGLINE "PAST RESULTS ARE N0T INDICATIVE 0F FUTURE RETURNS". BE SURE N0T T0 PICK FUNDS 0NLY BECAUSE THEY HAVE PERF0RMED WELL IN THE PAST - YESTERDAY'S BIG WINNERS MAY BE T0DAY'S BIG L0SERS.

C0NCLUSI0N

WHEN Y0U BUY ANY INVESTMENT, IT'S IMP0RTANT T0 UNDERSTAND B0TH THE G00D AND BAD P0INTS. IF THE ADVANTAGES THAT THE INVESTMENT 0FFERS 0UTWEIGH ITS DISADVANTAGES, IT'S QUITE P0SSIBLE THAT MUTUAL FUNDS ARE S0METHING T0 C0NSIDER. WHETHER Y0U DECIDE IN FAV0R 0R AGAINST MUTUAL FUNDS, THE PR0BABILITY 0F A SUCCESSFUL P0RTF0LI0 INCREASES DRAMATICALLY WHEN Y0U D0 Y0UR H0MEW0RK.