Disadvantages of Mutual Funds

If you are an investor you must have heard about mutual funds. The Mutual Fund offer return based on Investment class of mutual fund. Remember Higher return related mutual fund schemes also have higher risk. Many people nowadays many people invest in mutual funds for possibilities of higher return. But they don’t do their homework properly.

Remember, If you are one of those then you must have done your homework properly to be a smart investor. It’s very important to understand the drawbacks of mutual funds too because everything has two sides positive and negative you should have known both. You can also read 10 Advantages of mutual fund for better comparation with Drawbacks. The Disadvantages of Mutual Funds are varies scheme to schemes.

Disadvantages of Mutual Funds

Disadvantages of Mutual Funds

Here given are some of the disadvantages of mutual funds which you have to know to be a good investor. Disadvantages of Mutual Funds are

  • Volatility in Return
  • Lack of Control
  • Diversification
  • Issue of Fund Manager
  • High charges of sales and expense ratios
  • tax-inefficient knowledge among Investor
  • poor execution of trade
  • Winding up of the Mutual Fund Scheme

You can read these Disadvantages of Mutual funds in details in below discussion.

Volatility in Return

One of the big problems is that it doesn’t have any fixed return. you should always be ready for any results. When your Investment become huge amount then mutual offers too much range of price fluctuations. As a investor you must have long term Goals for your investment.

Based on type of Investment the Volatility in Mutual Fund scheme tends to high to low. The Equity and Hybrid Mutual fund have higher volatility. Even your Investment is going fine but in one month of time, you can loose your Gains. Anything can happen you a good return or may get a bad return too. Example In 2018, Many Small Cap mutual fund wiped out 50% more Investment amount in one year. So there can be loss on your investment amount.

Lack of Control

In mutual funds, all work of the management of mutual funds is done by experts or fund managers they are all supported by a group of analysts. all decision regarding this is taken by them you don’t have any Interference. So, you don’t have any control over this medium of investment. They allow you to watch some small steps or parameters by ultimate decision Taken by Professionals.

The customer can’t sell Mutual fund in real time. The customer need to wait for the settlement before the trade executed. The customer can buy ETF which offer real time settlement during Stock market hours.

Diversification

Many people consider diversification as a benefit of mutual funds but sometimes it becomes a disadvantage also. There is always risk of over-diversification in Mutual fund schemes. Like sometime Small cap fund offer more return or sometime Debt funds offer more returns. Over Diversification Increase operating costs. If your mutual fund scheme offering Negative return then the Expense ratio hit your Investment amount also.

Fund Manager Related Issues

As we discussed earlier fund managers are all who control everything in mutual fund. There are always chances of the skilled fund manager can shift from one company to another. The matter of Fund managers and Professionals is internal matter of Fund house but it affects your investment.

 High charges of sales and expense ratios

The Biggest Disadvantages of Mutual fund is higher Expense ratio. The Expense ratio, sales charges and Commission to dealer affect your Investment amount huge. In long run, you might feel that you get lower return. Expense Ration varies in each and every Mutual fund Schemes. The Schemes which has higher Expense ratio provide you less return.

You should look after these charges and expenses ratio. If you are a new investor and don’t know all this then you have to pay a high price for it. You don’t get anything for free in this world everything comes at special prices. similarly, in mutual funds, you have to pay some amount which is in form of the expense ratio and management fees for funds this way it takes money from. You and you don’t get anything for free in this

Tax Related Inefficient Knowledge among Investor

In India, certain Tax related rules and regulation changes frequently. There might be chance that customer can’t have sufficient knowledge related to Taxation on Mutual fund investment.

Believe it or not but when it comes to capital gains investors get an only distribution from which are unstoppable tax parts. Factors like redemption losses gains and holding of setting his throughout the period affect the Taxation part.

Poor execution of trade

Stock Market and Currency market offer you real time Trade Execution during market hours. But in case of Mutual fund, you can’t execute Buy and Sell of Mutual fund in Real time. You need to wait for a settlement period. So You don’t get a good trade execution experience here. 

Winding up of Mutual Fund Scheme

The Mutual fund Industry of India governed by SEBI. The issue of Franklin Templeton become huge issue among mutual fund players. The Debt schemes of Franklin Templeton wind-up without unit holders consent. The issue is still ongoing on Various Indian Courts against Franklin Templeton.

The Franklin Templeton wind up mutual fund schemes because of redemption pressure and lack of liquidity in the secondary market for the underlying instruments. Every Extra point of return comes with extra risk in Mutual Fund Investment. So don’t be too greedy for higher return.

Conclusion

As a investor you need to look at advantages and Disadvantages of Mutual fund. In this article we have provided in depth knowledge on Disadvantages of Mutual funds. Investor has to keep his eyes open while investing because this process looks easy but has some glitches too. The Mutual Funds governed by SEBI so there is no issue of Security of your investment amount.

The Franklin Templeton Issue created ripple effect in Mutual fund industry. In 2022, when Retail participation increased in Stock market and Mutual Funds. The customer are bringing huge liquidity in Stock market and Debt market.

This article will save your time and covered every small disadvantages of mutual funds go through it and you will have a clear idea about mutual funds in a better way