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Mutual funds can be agreat investment.
This helps mitigate the risks involved with investing.
But that doesnt mean you should overly rely on them.
Like any investment vehicle, they have their downsides, including tax liabilities and fees.
Heres what they said.
Many mutual funds are simply closet indexers, slightly over-weighting or under-weighting here and there, said Mahaffy.
This lack of control can be a disadvantage for those who prefer to have more say in their investments.
If you overly rely on them, you could end up paying more than you planned for.
Theyre also subject to shareholder demands, which could be more changeable depending on the market.
Mutual funds only trade once a day versus ETFs, which trade throughout the day, said Mahaffy.
Conversely, they need to make purchases with inflows money that may be chasing recent performance.
Of course, trading less often isnt necessarily a bad thing.
It depends on how the funds are managed and, of course, the returns.
Who Should Invest in Mutual Funds?
Its important to choose the right types of investments for your risk tolerance, goals, and experience.
However, ETFs can often offer similar results at a lower fee.
Should You Avoid Mutual Funds?
Not relying solely on mutual funds is one thing, but should you avoid them altogether?
Moreover, sometimes it may be worth the higher expenses if the fund is consistently delivering alpha.
This could include stocks or bonds, index funds, or ETFs.
Just do your due diligence beforehand.
Attempting to diversify without first understanding what you already own is futile.
Only then can you implement an asset allocation that properly reflects your goals and risk tolerance.
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