Mutual Funds are among the most well known financial products in the country today. Every investor, whether it is someone looking to invest for the first time or a seasoned investor, mutual funds is an option they have definitely considered. This investment option comes with a number of advantages, the chief among them being high returns, liquidity and diversification. All of these benefits combined together make mutual funds lucrative investment options in today’s times. However, there are times where investing in mutual funds might not be as profitable as you thought initially.
Here’s a look at how you might not be earning as much as you expected from mutual funds.
1. Over diversification
Diversification is often seen as one of the most important things for an investor in order to enhance the returns on their investments. The main advantage of diversification is that the investors can reduce the risk by investing in funds in different risk brackets. However, there are times when investors end up with over-diversification in their portfolio, leading to reduced returns or even losses on their investments. Investing in mutual funds can expose you to this risk. The investors run the risk of investing in a high number of funds that are too related and end up in the same bracket. This is when the returns on your mutual fund investments can diminish significantly with the slightest of fluctuations in the market.
2. Cash for liquidity
Mutual funds are seen as one of the best options when it comes to liquidation. It is one of the advantages attached to the investment option where investors can draw money as and when they want, without there being any hassles of a minimum lock-in period or a penalty for early withdrawal. However, this liquidity comes with a drawback of its own. Mutual funds operate by pooling money from different investors from across the world. In this model, there a number of people withdrawing money and investing money on a daily basis. In order to ensure that the liquidity of the funds for each investor is maintained, the funds generally have to keep a good portion of the investments as cash reserves. While this makes sure that you have great liquidity on your funds, it also results in a part of your investments not really being made to work to earn more and just sitting there in cash reserves.
3. Management Expenses
Mutual funds come with professional management of the investments and that is one factor that appeals to the investors a lot, especially if you don’t have a lot of experience in the investment market. However, these services come with charges of their own and they can be quite high generally. Regardless of the performance of the funds, the investors are charged for all of these expenses. In case the funds that you have invested in don’t do well, these expenses just add to your losses. Apart from the management expenses, mutual funds also come with a host of other charges under the operational and transactional costs. These charges further contribute to diminishing your returns on the investments you have made.
4. Returns not guaranteed
The biggest disadvantage that comes with investing in mutual funds is the fact that there is no guarantee on the returns. Mutual fund investments depend directly on the market performance, which makes it a highly unpredictable investment option. Even the professional fund managers can’t predict the performance of a fund with complete accuracy. In order to get a good return on your investments while covering all the additional costs and expenses, you need the funds to perform extremely well, which might not happen in a number of cases.