While mutual funds are great for beginning investors and investors who don’t have a lot of money, there can be downsides to this type of investment. Below are some reasons why mutual funds might not be the best choice for an investor.

Over-Diversification Can Stifle Returns

One of greatest advantages of mutual funds is its diverse array of investments. Because of this diversification, this investment presents itself as one that is low risk. If a few investments fall, there can be other investments that are doing well which saves you from experiencing great losses. However, low risk can also mean low returns.

Some mutual funds suffer from over-diversification — this means that because there are so many different investments, it becomes difficult to perform better. This is because growth is minimized, as some profits are canceled out by losses.

Lack of Control

Investing in mutual funds means leaving decisions over the assets and securities to the fund manager, or a board of manager. You will essentially have no control over the investments. This can become frustrating if the manager makes poor decisions and the fund start to lose money. In such a situation, the only action you can take is to sell out of the fund.

Fees

Besides the money, you want to invest in the mutual fund, those who choose this type of investment will have to set aside some extra cash to pay for the fees that come with mutual funds. All investors need to pay a percentage of operating costs either quarterly or annually. These operating costs can include things like the salary of the fund manager, marketing costs, as well as other fees. Besides operating costs, there are also separate fees for making transactions with a mutual fund, called sales load, or sales charge.

Over the course of one or two decades, these fees can add up and significantly cut into the returns from the mutual fund.

No Protections Against Losses

Besides a diverse portfolio, there is really nothing else that protects mutual funds against losses. If — in an extreme situation — each investment of the fund fell, all the money you have put into the fund would be lost completely. Unlike some other types of investments or funds, the initial amount that you had invested in a mutual fund, or the principle, will not be returned to you.

Many Under-performing and Poorly Managed Funds

Over the years, mutual funds have become a popular type of investment, especially for beginning investors as it is easy to understand and manage. As a result, there are now all kinds of different mutual funds that are available for investors — this can make it hard to distinguish which funds will succeed and which are being poorly managed. Before choosing to pursue mutual funds as an investment, it is important to note that nearly 75% of all mutual funds underperform or lose money regularly. Thus it is important to gain insight and advice before selecting a mutual fund.

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