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When are mutual funds considered a bad investment?


Mutual funds are considered relatively safe investments. However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end and back-end load charges, lack of control over investment decisions, and diluted returns.

High Annual Expense Ratios

Load Charges

Many mutual funds have different classes of shares that come along with front- or back-end loads, which represent charges imposed on investors at the time of buying or selling shares of a fund. Certain back-end loads represent contingent deferred sales charges that can decline over several years. Also, many classes of shares of funds charge 12b-1 fees at the time of sale or purchase. Load fees can range from 2% to 4%, and they can also eat into returns generated by mutual funds, making them unattractive for investors who wish to trade their shares often.

Lack of Control

Returns Dilution

Advisor Insight

Patrick Strubbe, ChFC, CLU, RFC
Preservation Specialists, LLC, Columbia, SC

Generally speaking, most mutual funds are invested in securities such as stocks and bonds where, no matter how conservative the investment style, there will be some risk of losing your principal. In many instances, this is not risk you should be taking on, especially if you have been saving up for a specific purchase or life goal. Mutual funds may also not be the best option for more sophisticated investors with solid financial knowledge and a substantial amount of capital to invest. In such cases, the portfolio may benefit from greater diversification, such as alternative investments or more active management. Broadening your horizon beyond mutual funds may yield lower fees, greater control, and/or more comprehensive diversification.

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About Amy Harvey

Amy R. Harvey writes forStartUps Sections In AmericaRichest.

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