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Do you feel mutual funds are bad investments? A definite yes due to certain aspects of this investment tool. Considering certain factors like cost and hidden load charges, and others, MF definitely make a bad instrument for investment. Let us see what factors make MF an unattractive tool.
Mutual funds are quite popular since a long time in most of the countries. There are some strong drawbacks of mutual funds. These drawbacks reduce the popularity of MFs as a good place to pool your money. Even if you are investing, consider how much these drawbacks are making your returns weaker.
Disadvantages of Mutual Funds
If you are one of the investors who give big leverage to any of the following factors then MFs are not good for you.
Mutual funds are quite expensive compared to other investment instruments. The annual expense ratio is indeed high. Rather you can yield better returns on market securities.
Besides basic cost, MFs have additional costs like commissions. Some MFs charge very high commissions.
2. Mutual Funds involve Load
MFs attract load charges. Different MFs charge front and back-end load charges. Load are fees charged on investors when they buy or sell the shares of the MF. The load charges amount to 2 to 4% and may drastically reduce the profits.
3. Low on Performance
As per market research statistics, the majority of the mutual funds fail to perform well even under favorable market conditions. They fail to perform better than any average investor. Returns are mostly bad compared to other options of investments.
4. Disadvantage of Lesser Control
The way you handle and own your own securities and equities is not the same with MFs. Investors do not have complete control over their shares of mutual funds. If you are an avid investor wanting to control your own shares, MF is not a good idea for you.
5. Limited Trading
Though MFs are liquid, you cannot sell or buy them in middle of the day. You can execute them at the end of the day after they calculate the current value of their total holdings.
MFs are good to add diversification to your investment portfolio. But MFs fail to leverage the positive power of any security. Even if a certain stock is doing extremely well, its positive impact on MF is very less because that security is only a small portion of MF’s holdings.
7. Cash Reserves
Mutual funds, in general, maintain large reserves of cash as a protection against large withdrawals. Larger cash reserves mean lower assets. This indirectly reduces the potential returns of the investors.
Though in the 90s the MF were almost like a mainstream investment, recent studies are showing a decline. For those investors who are trading actively with greater control and skill of their own, MF are rather a weak investment. Though there are many benefits of mutual funds like liquidity, and diversification of the portfolio, the drawbacks are important. Considering the drawbacks of every instrument, you can make your investment smarter.
View More Mutual Funds Information on Wikipedia