Pros and cons of mutual fund investing
Pros:
- Easy and simple
- Wide investment opportunities
- Wide choice - your personal portfolio
- Easy overview of your investment performance
- Tax incentives
- Good liquidity
- Diversification of investment risk
Easy and simple
Most of mutual funds allows to invest even for small investors. You can invest by transfering money to the mutual fund bank account after signing the investment contract.
Wide investment opportunities
Mutual funds allow even small investors to participate on growth of major world companies that otherwise would not be possible (e.g. bond trades where even millions of Czech crowns are needed). Mutual funds also bring considerably lower transaction costs, because funds usually trade in larger volumes and lower fees than individual investors.
Wide choice - your personal portfolio
There is a wide range of mutual funds varying in investment focus, risk and investment horizon. This allows investors to select a fund that best fits their needs. Investors can further eliminate the risk by diversifying their portfolio by investing in different mutual funds.
Easy overview of your investment performance
Quote (price) of the mutual fund is available in newspapers, by the fund manager and in points of sale of the fund at least once a week (members of UNIS ČR publish their quotes daily). By multiplying the quote and the number of your allotment certificates you get the total value of your investment.
Tax incentives
Profits from your mutual funds investments are tax advantaged. If you invest for a time period longer than six months, you do not pay any taxes from your gains. Mutual funds themselves were taxed by 25%. Foreign mutual funds registered in Luxembourg or North Ireland do not pay even this tax. Nowadays, Czech mutual funds pay a tax of only 15%. Therefore, their tax disadvantage compared to the foreign funds has decreased.
Good liquidity
You can ask your fund manager at any time to buy back your allotment certificates for current price. You shoud obtain the proceeds by 30 days. Compared to time deposits, mutual funds allow for easier access to your money.
Diversification of investment risk
Mutual funds usually invest in tens of companies and are therefore able to effectively diversify investment risks.
Disadvantages:
- Your investment is not insured
- The yield is not guaranteed
- Value of the investment fluctuates
- Levies and discounts
Your investment is not insured
Mutual fund investments are not insured, but mutual funds are subject to strict regulation. Czech SEC, depository institution and an independent auditor follow the mutual funds activities. Investment funds property is being accounted for separately from the property of the fund manager. Also, the fund manager must not invest contrary to the law and the fund's status. Members of UNIS CR volunteered to follow even stricter rules than the law requires.
The yield is not guaranteed
When investing in mutual fund, you need to keep in mind that the past performance of the fund does not guarantee the same performance in future. The value of your investment may fluctuate. Value of your investment at the end of the investment cycle can be lower than it was at the beginning. This risk can be eliminated by investing for a longer period of time, because higher risk investments tend to deliver higher yields in the long run.
Value of the investment fluctuates
When investing in equity, balanced and index funds, investor should be aware of the fact that the price of the fund may significantly fluctuate.
Levies and discounts
Purchase of allotment certificates is often associated with certain levy. In case of smaller investments, the levy may reach even 5,5%. Investors willing to invest more than CZK 1 million should also review the possibility to use individual asset management.