Is Mutual funds, fixed deposit interest rates a bad idea?
Disadvantages of Mutual Funds
With immense advantages, there have to be some disadvantages that an investor has to face with mutual funds. Here’s a list of all the possible disadvantages you need to look out for.
High Expense Ratios and Sales Charges
If you are not taking care of mutual fund sales charges and expense ratios, they will get out of hand. Be very careful when you invest in funds with an expense ratio that exceeds 1.50%. The market considers it to be a high-cost end. In addition, be cautious of 12b-1 sales charges and advertising fees in general. Many mutual fund companies in the business have hidden sales charges. These fees will reduce your overall returns on the investments.
Management Abuses
Window dressing, churning, and turnover will happen if your manager abuses their authority. It includes excessive replacement, unnecessary trading, and selling the losers before quarter-end to fix the books.
Tax Inefficiency
It is sad to say that investors do not have a choice when it comes to capital gains payouts in mutual funds. Because of the redemptions, turnover, losses, and gains in security holdings throughout the year, investors typically receive disseminations from the fund that are ungovernable tax events.
Poor Trade Execution
If you are placing your mutual fund trade right before the cut-off time for same-day NAV (Net asset value), you are bound to receive the same closing price NAV (Net asset value) for your buy or sell on the mutual fund. As a result, investors interested in faster execution times can, because of day trading, timing the market, or short investment horizons, mutual funds fail to provide a strong execution strategy.
Fluctuating Returns
Mutual funds usually do not offer fixed assured returns, so you should always be prepared for any eventuality, including devaluation in the value of your mutual fund. It only means that mutual funds can have a wide range of fluctuations. Professional management by an expert or a team of experts means that your fund can’t perform poorly in the market.
No Control
Fund managers handle any and every type of mutual fund. In addition, there are chances that a team of analysts sometimes supports the fund managers. Thus, as an investor, you won’t have any control over your investment. The fund manager takes all major decisions concerning your fund.
Diversification
Diversification is considered one of the most significant advantages of a mutual fund. But it comes with the risk of over-diversification, directly affecting the operating cost of a fund and increasing it, as it requires greater due diligence and dilutes the relative advantages of diversification.
Past performance
Rating and advertisements shown by companies can only be seen as an indicator of a fund’s past performance. We advise you to remain cautious as these performances are only of the past, and they never guarantee a similar performance in the future. As an investor, you should analyze the investment transparency, philosophy, compliance, ethics, and overall performance of a fund management company in the market. The Rating and reviews can be taken as a reference point.