Disadvantages of a Mutual Fund
Disadvantages of a Mutual Fund
There is no perfect investment vehicle. This is also true in mutual funds. As there are advantages, there are also disadvantages of a mutual fund. Engaging in the stock market is never-risk free. There is a need to do some inquiries and learn some investment know-how to protect one's financial asset.
Listed hereunder are some of the common disadvanatges of some mutual funds;
Fluctuating Returns
Mutual funds do not provide guaranteed returns. Like any other investments, they are susceptible to investment risks and losses. Mutual funds experience price fluctuations depending on how the stock market fares in a particular day. So, there is a need to fully understand and research the competence and earning potential of a particular fund and its money market fund manager before deciding to buy or acquire share from it. Some mutual funds are not guaranteed by the U.S. government and other countries in particular, this means that there will be no insurance that the invested money will be returned once there is a case of dissolution. A mutual bank is not FDIC-insured.
Transaction Costs and Charges
Investing with mutual funds is not free. Mutual fund have a different fees and charges applied to the cash pooled every time an investor make additional investments. Some of these are entrance and exit fees (load and redemption charges), fund management fees and some hidden charges. An investor must first consult with the mutual fund company to specifically learn about these charges.
Misleading Advertisements
The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap or income. The SEC requires funds to have at least 80% of assets in the particular type of investment implied in their names. The remaining assets are under the discretion solely of the fund manager.
The different categories that qualify for the required 80% of the assets, however, may be vague and wide-ranging. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. Instead of labeling itself a small cap, a fund may be sold under the heading growth fund. Or, the "Congo High-Tech Fund" could be sold with the title "International High-Tech Fund". (investopedia.com)
Difficulty in Evaluating Funds
Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do you know if one fund is better than another?
Furthermore, advertisements, rankings and ratings issued by fund companies only describe past performance. Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". Be sure not to pick funds only because they have performed well in the past - yesterday's big winners may be today's big losers. (investopedia.com)
Lack of Investment Control
Mutual fund investment decisions are handled by a fund manager. He or she makes all decisions on what securities to buy, when to do it, and what to do about these securities. Some investment decisions may run adverse to where your investments should be place resulting to lack of controlin your mutual fund shares.