Advantages of Mutual Funds
One of the most obvious advantages to having a mutual fund is the investments are already diversified. This diversification will result in the mutual fund spreading out the risk of investment through several sectors. In reality, if one stock does not do as well, there will be others that will do relatively well which will make the loss more manageable.

Another great advantage is that investors who purchase a mutual fund will have professional managers. He or she will monitor the portfolio so the investor will get the most for their money. As most investors will attest, the cost of trading is usually bothersome at best and discouraging at worst. Purchasing a mutual fund will make trading costs more manageable because stocks are bought and sold on a large scale.

One of the best aspects of a mutual fund is the simplicity of purchase. Since most banks have their own line of mutual funds, purchasing one may be a simple as going to your financial institution. Mutual funds also usually carry a small investment requirement, which means that more investors have the ability to consider this as a real option.

Earning Money
Earning money with a mutual fund can be done in three different ways. The first and simplest way is to wait. This means that the stocks will pay dividends, the bonds will pay interest, and this payment is called distribution. The second way is by the selling of stocks. The managers will routinely sell stocks when their price hits a certain amount, and the profits will be passed on to the investor. The last way to make money is a little complicated, but in essence, the investor can sell his or her mutual fund.

Disadvantages
Though mutual funds can be seen as one of the least risky ways to invest in the stock market, there are some very real disadvantages that should be taken under consideration. It is important to remember that while the professional fund manager may be well qualified, he or she is still human, and can make mistakes. While this may not result in a major loss, it does have the potential of costing the investor money. Remember that the manager will still be paid no matter how the mutual fund performs.

One more disadvantage is the complexity of the mutual fund itself. This can result in many of the costs associate with the fund being unclear, and this can be compounded if the manager does not have a clear understanding of changing markets. Over the years, there has also been some questions raised about the over diversification. While some diversification is needed to protect mutual fund owners, if a mutual fund does not have enough holdings in companies that are experiencing high returns, then the overall return on investment could still be low. Lower than expected returns can also occur when the mutual fund is doing too well and the manager cannot find enough good investments to reinvest.

Most professional managers will not take into consideration individual tax situations before making financial decisions. If the fund manager sells a security, it may be in the owner’s best interest to defer a capital gains liability.