What are the disadvantages of mutual funds？

Key Takeaways

• Mutual funds have four main disadvantages: high fees, uncertainty, lack of control, and management misuse.

Understanding the disadvantages of mutual funds

Investors must have a good understanding of the advantages and disadvantages of mutual funds before making an investment decision. Their drawbacks are as follows:

High fees. All mutual funds incur costs that reduce the overall returns. The fees generally fall into two categories: shareholder fees and annual operating costs. Shareholder fees are associated directly with investors' transactions, for example, buying, selling, and exchanging mutual fund shares. On the other hand, annual operating costs are paid out of fund assets (investors are paying them indirectly), including investment advisory fees, marketing and distribution expenses, brokerage fees, custodial, transfer agency, legal, accountants' fees, etc.

Investors should watch out for higher mutual fund fees because they can quickly and devilishly eat into your profits over time.

Uncertainty. Even though investors pay the fees listed above, there is no guarantee of the performance of mutual funds. With mutual funds, investors may lose some or all of the money they invest because the securities held by a fund can go down in value. 

Lack of control. Investors have no control over the investment holdings since a professional fund manager manages the mutual fund. Although investors can select a general type of mutual funds by industry or sector, they cannot directly control allocated money. The fund manager has the final say over specific securities and the execution of orders. In other words, investors place their complete trust in the fund manager's hands when they invest in a mutual fund.

Management misuse. Mutual fund managers may misuse their authority sometimes. Standard abusive practices include an unreasonable replacement, unnecessary trading, etc.