Dividends are profits that companies share with you if you are a stock shareholder. Dividend mutual funds are stock mutual funds that invest in the companies that pay dividends.
Today, mutual funds are a popular investment and something you may be considering. But before investing, you should be aware of the advantages and disadvantages when it comes to dividend mutual funds.
Pros of Dividend Mutual Funds
Easy and Fair Pricing: An advantage of mutual funds is that they are common and easy to purchase. They are traded once a day at the closing net asset value (NAV) and usually have a low minimum investment. This is good for investors because it eliminates price fluctuation throughout the day as well as different arbitrage opportunities that day traders are known to practice.
Income: If you are looking for a source of income, especially in retirement, dividends can provide you with reliable payments. These payments come from their mutual fund investment. Your investment can also grow when you use dividends to buy more shares in the mutual fund.
Safer: Dividend mutual funds are known to be less risky than other types of funds like growth stock mutual funds. What makes them safer is the use of diversification. Most mutual funds invest in somewhere between 50 and 200 different securities. Multiple index stock mutual funds own about 1,000 or more individual stock positions.
Economic Environments: An appeal of dividend mutual funds for investors is that, unlike bond mutual funds, mutual funds can be used to pay dividends in economic environments.
Cons of Dividend Mutual Funds
Taxes: Before investing, you should be aware that when you use dividend mutual funds, dividends are taxed as regular income. Investors often choose to buy dividend mutual funds in an individual retirement account (IRA) or 401(k) because earnings can grow tax-deferred until withdrawals start.
Poor Management: A disadvantage of mutual funds is management abuse which sometimes can happen when your manager abuses his or her authority. This is seen in unnecessary trading, selling the losers before the quarter-end to fix the books and too much replacement.
Poor Trading: Mutual funds offer a weak execution strategy for those looking for faster execution times. This is because if you place your mutual fund trade anytime prior to the cut-off time for same-day NAV, you can expect the same closing price NAV for your buy or sell mutual fund.
High Expense Ratios and Sales Charges: You will need to pay close attention to mutual fund expense ratios and sales charges because they are known for getting out of hand. It is suggested to be cautious of not only funds with expense ratios higher than 1.20% (which are viewed on the higher cost end), but also 12b-1 advertising fees and sales charges. It is a good idea to search for mutual fund companies that have no sales charges. Investment returns are reduced by fees.
