Aomori Group looks at the disadvantages of mutual funds and why they are not always for everyone.
Mutual funds offer many advantages to the investor and are especially suited to smaller novice investors, but they are not for everyone. For this reason Aomori Group highlights some of the main disadvantages to investing via mutual funds.
The biggest disadvantage associated with mutual funds is the associated fees and expenses. All funds will charge annual expenses which could be as much as 2% and can significantly eat into the returns of the fund. Some funds also charge load fees, which are applied either when you buy into the fund (front load) or sell (back load) and can in their own right be significant sums of money. Not all funds charge loads though.
There is also little to no control that an individual investor has over what to invest in, as this is delegated to the fund manager. For this reason Aomori Group often recommends against investing in mutual funds for more experienced and hands on investors.
There are potential tax implications as you can receive gains whenever the fund decides to sell individual holdings. With individual stocks the investor can decide when to sell that best suits them and their tax liability, that control is lost with mutual funds.
Mutual funds must also hold a certain amount of their fund in cash in order to be liquid for further stock purchases and also to meet investor redemption orders. The investor still pays the fees on the total amount of the fund, including this cash portion, so they lose significantly on this portion of their funds. It is estimated that this can amount to as much as 0.85% of their fund per year.
Mutual funds are not for everyone, but they do meet many investors’ needs. Aomori Group recommends thorough research before making the decision to invest.