The pitfalls associated with mutual funds

People are of the view that investing in mutual funds paves way for profits. But if you get into details about inputs of a mutual fund advisor there are some pointers you need to guard against. Let us get to the details

Costs

This could work in the positive or negative as far as performance of mutual funds evolve. There are certain types of mutual funds which have a high price tag associated with them. They charge investors for managing such funds. It all depends upon the fund meaning that charges can be significant.

The moment you plan to exit from a mutual fund you might be charged an exit charge. Do check out the charges before you are planning to invest in a fund. These charges are applicable in case if you sell your funds within a specified period of time.

An investor should take solace of the fact that different funds have varied expense ratios. As compared to actively managed funds, a passively managed fund is expected to have less expense ratio. The reason being that they lack the underlying index and there is no need for a fund manager to take active calls. The lower costs also point to the lower levels of operational efficiency of a fund house.

Dilution

This has to be one of the major drawbacks. When you diversify you end up having an average impact on your investments. Yes to a considerable extent you end up keeping away from losses, it helps you to cut down on major gains. In fact the major gains would get diluted.

For this reason there is a saying that you should not end up investing in a lot of mutual funds. Mutual funds themselves can be classified into diversifying investments. To buy a lot of mutual funds in the name of diversifying is not a sensible idea.

To compare mutual funds with other investment types

Inflation would increase the value of your money over a period of time, it is important that you put your hard earned money in the right channel. If you do not invest the money it is going to lose the purchasing power.

Equities possess the maximum amount of risk, though savings account has the least degree of risk. Your investment module is going to depend upon the type of risk you are willing to take. In addition to this you need to consider the time horizon of how long you are planning to remain invested.

PFF ceases to be one of the popular options. But with due course of time the investment in PFF has not seem to be really attractive as the lock in period of 15 years could seem a bit too much.

Any return on fixed deposits is expected to become negligible once you pay for tax and inflation. The only benefit of such funds is that liquidity is provided fast. Though bonds promise you with higher compound returns but they are more prone to higher interest hikes when you compare it to mutual funds.

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