There are a series of reasons why not to dabble in the mutual funds market as an investor. There are currently well over 10,000 mutual funds in operation, and these funds differ in terms of their investment objective, strategy, leadership style, and size. Mutual funds are virtually offered in every sector i.e. internet, and most countries.
There is no insurance against losses
Mutual funds are regulated by the government, but they do not provide insurance against investor’s losses. The FDIC only insures person’s losses, when it’s a matter involving banks, savings, and credit unions, but not mutual funds.
Expenses and associated fees
The most common fee is the 12b-1 fee. This fee is disclosed as such in the mutual fund’s prospectus. Many mutual funds do not charge this fee, and for those that do, and think it erroneous, then avert your investments into a different mutual fund that does not charge the 12b-1 fee. Other fees include a ‘redemption fee’, which is a sales charge for when a given individual makes a sale on an investment (i.e. mutual funds). Some firms acquire and sell shares so frequently that they incur significant transaction costs. These fees are often charged so that they can cover the funds management expenses (often costing 1.0% to 1.5% per year).
Diversification decreases the level of risk associated with investing in mutual funds, often due to dilution. Dilution is a change in the book value of per share that is a direct result of all stock options and warrants (a certificate given with a bond or preferred stock giving entitlement to the holder to purchase a specified amount of securities, at a given price, often higher than the current market’s price) were used, and all those securities (convertible) were converted. By hosting a large number of different investments within a portfolio, they do neither ‘exceedingly well’ nor ‘exceedingly bad’.
Mutual funds are incredibly liquid in a general sense, but, mutual funds known as ‘open-ended funds’, cannot be purchased or traded during mid-day trading. Expect only to acquire or sell these at the end of any given trading day.
Mutual fund returns are not guaranteed. It’s been estimated that roughly 75% of all mutual funds fail to beat major market indexes i.e. S&P 500. Over the last few years there has been a growing concern about whether or not these expert fund managers have better stock-selection capability, than the average ‘Joe’ and ‘Jane’ investor.
Mutual fund managers, make the final decision on which securities they will purchases and trade and when to do this. This can make it more difficult for the investor trying to manage their portfolios. As the investor, you would be entrusting someone else with your money, when they handle your investment in the mutual fund. Some of the manager’s decisions can lead to acquiring a security with increased tax consequences, thus passing on higher fees (those imposed by the taxes).