Finance

Advantages and disadvantages of mutual funds

Funds are a popular investment. This is also because they spread the risk across many securities. But there are more advantages. t-online shows you which ones they are.

Investment funds are the ideal entry point into the capital market, especially among newcomers to the stock market. Because a fund works like a basket of money: you and other investors pay money into it. This money is then invested – in the case of an equity fund, for example, in many different company shares.

A fund therefore offers several important advantages over the Investment in individual stocks. But there are also disadvantages and alternatives. We’ll show you what to watch out for.

Active and passive funds
An active fund is managed by a fund manager. A passive fund, on the other hand, is about a stock index like the Dax after.

What are the benefits of a fund?

A fund offers several key advantages – for example compared to investing in individual stocks. An overview:

  • Security: A fund invests in many different securities at the same time. If the price of a single share in the equity fund crashes, you as an investor need not be alarmed. Because your risk is broadly diversified, the possibly rising price of another share in the fund offsets the loss. Another security aspect: Funds are considered special assets in Germany. This means that the invested money must be kept strictly separate from the assets of the fund company. So if the fund company goes bankrupt, your money is safe.
  • Simplicity: Investment funds are particularly suitable for beginners because the investment is very easy. All you have to do is choose a fund and put money into it. The fund manager will do the rest for you. You just have to think about when to sell your fund share again.
  • Transparency: Fund companies in Germany are subject to strict transparency rules. You have to regularly disclose which investments you are investing your money in.
  • Return: The return, known as the return, is significantly higher with a fund than with an investment based on interest – such as the classic savings account.

What are the disadvantages of a fund?

But an active fund also has some disadvantages. A selection of the most important:

  • Costs: Compared to buying so-called passive funds, also known as ETFs, in which a computer algorithm replicates an index, you have to accept high fees in some cases with actively managed funds (see below). You can see that in the total expense ratio, the “TER”. For active funds, this is a good 1.5 percent per year. With ETFs, however, you pay well below one percent.
  • Performance: Active funds are often no better than the market. That means: A fund manager’s performance rarely beats an index that an ETF replicates.
  • Participation: What is an advantage for newcomers to the stock market can be daunting for professionals. Because with a fund, investors have no say in their investment. In fact, they leave the field to the fund manager. This decides which stocks or bonds to buy – and which to sell. That’s why professionals are more likely to trust individual stocks. But they carry a high risk of loss.

What alternatives do I have to a fund?

An alternative to one active fund is a passive fund, a so-called index fund, too ETF called. In this case, a computer algorithm reproduces an index, such as a stock index such as the Dax. So you invest in all company shares, the price development of which is shown by the stock index.

As with an active fund, you spread the risk very widely here. But the costs are significantly lower. The advantage over active funds: The fees are significantly lower. Because there is no fund manager to be paid. Since higher fees reduce your return significantly in the long run, you should pay attention to this.

Instead of investing in a fund – whether active or passive – you can also invest in individual stocks or bonds invest. But note: Here you do not spread the risk so widely. So it can be very easy to lose the money you have invested.

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