03 April 2015

Disadvantages of Mutual Funds

Like many investments, mutual funds offer advantages and disadvantages, which are important for you to consider and understand before you decide to buy. Here we explore some of the drawbacks of mutual funds.

Fluctuating Returns
Mutual funds are like many other investments without a guaranteed return. There is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be good.

No Insurance
Mutual funds, although regulated by the government, are not insured against losses. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur,

Mutual funds provide investors with professional management; however, it comes at a cost. Funds will typically have a range of different fees that reduce the overall pay-out. In mutual funds the fees are classified into two categories: shareholder fees and annual fund-operating fees.

The shareholder fees, in the forms of loads and redemption fees, are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money these fees only magnify losses.

Loss of Control
The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you. You also should remember that you are trusting someone else with your money when you invest in a mutual fund.

Trading Limitations
Although mutual funds are highly liquid in general, most mutual funds cannot be bought or sold in the middle of the trading day. You can only buy and sell them at the end of the day, after they've calculated the current value of their holdings.

When you buy any investment, it's important to understand both the good and bad points. If the advantages that the investment offers outweigh its disadvantages, it's quite possible that mutual funds are something to consider. Whether you decide in favour or against mutual funds, the probability of a successful portfolio increases dramatically when you do your homework.