Drawbacks of Mutual Funds

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The Drawbacks of Mutual Funds are the major obstacles for the growth of the same. Management risks, trading limitations and absence of taxes are some of the major drawbacks of mutual funds.

The Drawbacks of Mutual Funds

  • Fees and commissions: The Mutual funds charge administrative fees to meet the daily expenses. Many funds charge brokerage or 'loads' to pay financial planners or financial consultants, brokers. In case a shareholder does not use the services of financial adviser, he still has to pay a sales commission.

  • No Guarantees: All investments bear risk factors. The Mutual Funds are no different. It depends on the stock market. A fall in the stock market would trigger a fall in the value of the mutual fund shares. Although the risk factor pertaining to Mutual funds are much lower compared to Mutual Funds.

  • Inefficiency of Cash Reserves: The Mutual Funds maintain big cash reserves, for situations such as a number of large withdrawals. The investors are provided with liquidity, and a major portion of the financial resources is maintained as cash, and it is not invested in some assets.

  • Management risk: The investment pertaining to the Mutual Funds depends on the fund manager and his selection of the mutual fund portfolio, which is based on speculation. If things do not go as expected, the investments may not earn enough money.

  • Taxes: The proceeds from the sale of mutual funds are taxable, even if the same is reinvested in mutual funds.

  • No Insurance: The Mutual funds are regulated by the central government. However mutual funds are still not insured against losses.

  • Trading Limitations: The Mutual Funds usually have high liquidity, but most of the mutual funds, such as open-ended funds, are bought or sold at the end of the day.

  • Loss of Control: In case, if the mutual funds are managed by the investor himself, the portfolio management may go bad and have an adverse effect on the earnings from the investment.

Last Updated on 06/26/2011

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