Thursday, June 13, 2013

Disadvantages of Mutual Funds - Demerits of MFs - Drawbacks of MF Investment

The advantages and benefits of investing in Mutual fund are attracting a large number of people towards savings investments. After collecting the funds they are invested in various instruments of the capital market like securities, shares and debentures.

Types of Mutual Fund Schemes

  • Open - Ended Schemes – You can buy and sell mutual funds at any course of time.
  • Close - Ended Schemes – These kinds of mutual funds have a pre-mentioned maturity period
  • Other types are includes of,
                 Equity funds 
                 Exchange-traded funds 
                 Bond funds 
                 Money market funds 
                 Hedge funds 


Benefits of Investing Mutual Funds

Summary of advantage of investing in mutual funds is provided below here. 

  • MFs investments managed by qualified and professional experts.
  • Investment diversification
  • Liquidity 
  • Risk pertaining to the Mutual Funds is quite low 
  • Brokerage and other fees are very low 
  • Mutual Funds division is monitored by the SEBI. So investor’s MF investment is safe 
  • Open - Ended Schemes – You can buy and sell mutual funds at any course of time                                          You can withdraw at any time etc...

Top Disadvantages of Investing Mutual Funds


The major and minor disadvantages of mutual funds or demerits of investing mutual funds are here discussed at below here. 

MF investment Information collection is costly for normal investors. Fund managers needs to work hard to finding good performing stocks and numerous investments schemes, best savings plans. 

Lack of professional management – For few kinds of mutual funds, you can’t manage them without MF investment information and without investing skills.

Scope for market risks – High to low degree of market and investment risk may exist in addition to trade risk. Mutual fund investments are subject to available market risks

Investment diversion – Fund investment will be diversified into other funds like bonds, securities and other investment tools. Diversification of portfolio doesn't improve returns double or triple if share stock market is in decline situation.

Buying and selling fees – These are normally hidden and visible (Ex: 12b -1 fee). These include operational charges, fees and commissions or sales fee or loads can reduce overall investment yielding returns. Financial consultants, or brokers or financial advisors or agents might receive some portion of these fees and get paid by your fund managing company.

Lack of direct control – You can control directly fund managers. You can’t choose available best investment sources. You have no control over your investments

Uncontrollable tax inefficiency - Lack of tax benefits on frequent purchase and trade of mutual fund schemes. Even you have to pay taxes on the earned income you obtain on your MF investment. Individual tax can’t applicable for tax benefits.

No Guarantees earnings – You can expect yieldings over your capital. Profits depend on many uncontrollable factors. The profits are depends upon your capital invested amount. Capital investment portfolio building difficult for low investments amount. No guarantee of returns on capital.

Conclusion of Demerits or Drawbacks of Mutual Funds

Each saving investment schemes and plans are having their own benefits and drawbacks. 

Mutual funds have their drawbacks and may not be for all kinds of mutual funds and MF investors.

Unlike all savings investment plans, the mutual funds schemes have certain disadvantages of investing.

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