Although mutual funds often many advantages and can be a great investment, there are a number of disadvantages to them. The purpose of this article is to review the disadvantages of mutual funds.

1. Over-Diversification. One of the issues with mutual funds is over diversifying the holder’s investment. This occurs when a fund has so many stocks in it that it is impossible to outperform the market. This has occurred, because the manager of the fund has a great deal of cash to invest, and this can result in the need to purchase a lot of different stocks.

This does not mean that large mutual funds are bad, but the purchaser needs to be aware of the goals of the fund and how review how the manager invests the cash they are provided with.

2. Lack of Security. No guarantee is available with mutual funds. It is possible to lose a portion if not all of your investment, if the market goes south. Unlike financial products that are trying to produce a consist income, mutual funds are trying to grow as much as possible and fluctuate along with the price of the stocks that are purchased by the fund.

No mutual fund is backed by the government and no return is guaranteed regardless of the track history, so before purchasing the investor needs to decide if the risk involved is worth the potential reward.

3. Idle Cash. Idle cash is another disadvantage of mutual funds. Because funds are owned by many investors, there is money that has not been used for investments and money being out of the market in order to be paid to investors making withdrawal.

This cash is not invested, so it can make no money for you and the whole point of owning the fund is to make money.

4. Transaction Fees. When you own a mutual fund a portion of your investments goes towards fees and operating costs. These costs include paying the fund manager, transaction fees for buying and selling stocks, and paying for research. All of these fees end up being a couple of percentage points every year. These fees are paid whether you make or lose money.

5. Loss of Control. Investing in mutual funds also results in the investor’s loss of control. This is because the investor does ot control when securities are bought and sold. These transactions may result in additional taxes that the individual has no choice to deal with.

In contrast when purchasing individual stocks the investor can control when to buy and to sell based upon the company’s distributions that can result in such taxes as capital gains.

6. Lack of Data. Perhaps the biggest disadvantage of mutual funds is that the investor does not necessarily have a lot of data available in which to evaluate the fund. Unlike an individual stock, you do not have a P/E ratio, and you do not have sales or liability trends to evaluate.

7. Under-Performance. As we’ve talked about before, 70% of mutual funds don’t beat the market. That’s not good. That means you only have a 30% chance of keeping up with the market if you invest with a mutual fund. What’s worse, of that 30%, most of the funds that do beat the market won’t probably beat the market next year.

These are just a few of the advantages that the investor needs to be aware of before purchasing a mutual fund. This isn’t to say you should never invest in a mutual fund. They can be fantastic investment vehicles, just as long as you pick the right one. Of course, if you invest blindly in mutual funds without proper homework, you’re probably going to lose a lot of money.

Keep learning more:

1. Best Mutual Funds: How to Pick the Best Mutual Fund


2. What is a Mutual Fund?


3. Types of Mutual Fund Fees and Expenses


4. The Disadvantages of Investing in Bonds


5. Do Mutual Funds Outperform the Market?


6. The Advantages of Investing in Mutual Funds


7. Mutual Funds Allow Instant Diversification

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