Pros and cons of indirect investing
Investing indirectly means purchasing shares of companies that hold large portfolios of securities on behalf of their share holders. Indirect investing is a great opportunity for those who are willing to start investing with a small amount, having no previous knowledge or experience of stock market’s ups and downs. You can decide if indirect investing is the right choice for you after examining the following features.
Level of Risk:
Although mutual funds are managed by qualified professionals and experts, no expert can guarantee a profit on every investment made. There are many uncontrollable variables involved and then there is always a chance of “something” unpredictable happening, normally referred to as “the great unknown”. Mutual funds can be divided into different categories on basis of risk, for example “hybrid fund” being less risky while “specialized stock funds” falling in the high risk – high return category.
Professional Management:
Probably the biggest advantage of indirect investment is the fact that these investment companies have experts specializing in investment analysis and portfolio management. These companies always stand a better chance for positive yields as compared to a common man who barely knows about financial markets. If you are just starting, you should go for these companies. You can always move your funds elsewhere later on.
Extra Charges:
Investment companies do not provide this high quality portfolio management services for free. Of course they charge for these services. Also, most of these companies run excessive marketing and sales campaign because of competition. Some part of this expense is also charged from investors, known as sales load.
Discount & Premiums:
Net asset value of Investment Company’s share keep going up and down based on company’s performance. In case of close-end funds, these shares are not always traded on Net Asset Value. If sold at a price lower then Net Asset Value, these are said to be sold at discount and if the price is higher then Net Asset Value, they are selling at premium. This provides an opportunity to earn, even when the Net Asset Value has not changed.
No Security - No Control:
These mutual funds are not guaranteed by any government body or authorities, nor do they provide any specific protection. Another short coming is that you cannot control the proceedings; you have to rely fully on the company’s management decisions regarding investment. If you can’t bear the fact that someone else is deciding on your investment fate, you should go for direct investment.
Level of Risk:
Although mutual funds are managed by qualified professionals and experts, no expert can guarantee a profit on every investment made. There are many uncontrollable variables involved and then there is always a chance of “something” unpredictable happening, normally referred to as “the great unknown”. Mutual funds can be divided into different categories on basis of risk, for example “hybrid fund” being less risky while “specialized stock funds” falling in the high risk – high return category.
Professional Management:
Probably the biggest advantage of indirect investment is the fact that these investment companies have experts specializing in investment analysis and portfolio management. These companies always stand a better chance for positive yields as compared to a common man who barely knows about financial markets. If you are just starting, you should go for these companies. You can always move your funds elsewhere later on.
Extra Charges:
Investment companies do not provide this high quality portfolio management services for free. Of course they charge for these services. Also, most of these companies run excessive marketing and sales campaign because of competition. Some part of this expense is also charged from investors, known as sales load.
Discount & Premiums:
Net asset value of Investment Company’s share keep going up and down based on company’s performance. In case of close-end funds, these shares are not always traded on Net Asset Value. If sold at a price lower then Net Asset Value, these are said to be sold at discount and if the price is higher then Net Asset Value, they are selling at premium. This provides an opportunity to earn, even when the Net Asset Value has not changed.
No Security - No Control:
These mutual funds are not guaranteed by any government body or authorities, nor do they provide any specific protection. Another short coming is that you cannot control the proceedings; you have to rely fully on the company’s management decisions regarding investment. If you can’t bear the fact that someone else is deciding on your investment fate, you should go for direct investment.
posted by William King @ 8:47 PM
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