We’re done discussing the advantages of investing in mutual funds, so we’ll be listing down the downside of partaking in this investment:
Disadvantages:
Costs
As you know by now, a professional manager handles your
investment, but that of course comes at a cost.
These fees are subtracted from the overall payout from the
fund. They are also measured by mutual fund investors regardless of the outcome
– the performance – of the fund. For instance, if the fund no longer makes
money as years pass by, the fees will only make losses grow bigger.
Evaluating Funds
If you want to learn of the situation of other mutual funds,
it will not be easy. Obtaining information about the other mutual funds out
there and comparing them with yours is not an easy task to accomplish.
Mere research will not suffice if you wish to compare the price-earnings
(P/E) ratio, earnings per share, sales growth, etc., of yours with others. The net
asset value of a mutual fund gives the investors the total value of the fund’s
portfolio, without the liabilities. But even though you have this, how would
you know if one fund is better than the other?
Unstable Returns
Just like any other investment that does not have guaranteed
returns, the possibility of your mutual fund declining in value is always present.
Equity mutual funds experience the unstable prices together
with the stocks that make up the majority of the fund. There is no guarantee
when it comes to the performance of the fund, and the Federal Deposit Insurance
Corporation (FDIC) does not provide back-up in mutual fund investments.
You should of course still consider the fact that almost all
existing investments have risks. So make sure to determine those risks fully
before staking all your money in that investment.
Diworsification
This is diversification gone wrong. A lot of mutual
investors tend to make everything too complicated (e.g. acquiring too many
funds that are highly related, this then cancel the risk-reducing benefits
provided by diversification.) Such situation will cause bigger losses for the
fund as it only exposed their portfolio more. This syndrome is known as
diworsification.
You should still keep in mind that owning mutual funds does
not automatically give you a diversified portfolio. An example of this will be
a fund that only invests in a certain industry sector or region, which is still
risky.
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