Disadvantages of Mutual Funds

There are various disadvantages or cons of investing in Mutual Funds including factors such as fees and expenses, market risk, and potential for underperformance compared to other investment options.
EXPLORE FUNDS
Problems of Mutual Funds in India
EXPLORE FUNDS
4 mins
15-January-2024

Mutual funds offer several benefits, including professional portfolio management, automatic dividend reinvestment, and the potential for risk diversification. However, investors should also be aware of potential drawbacks such as management fees, tax inefficiencies, and potential conflicts of interest.

What are mutual funds?

Before we understand the disadvantage of mutual funds, let's clarify what mutual funds are. Mutual funds pool money from multiple investors to invest in various assets like stocks, bonds, or other securities. Professional fund managers oversee these investments, aiming to achieve the fund's objectives, whether it's growth, income, or a combination of both.

Disadvantages of investing in mutual funds

There are some disadvantages of investing in mutual funds like Fees and expenses, lack of control, market risk, etc. Listed below are details about some disadvantages of investing in mutual funds:

  1. Fees and expenses: Mutual funds charge a variety of fees, such as management fees and transaction fees. These fees can eat into your returns.
  2. Lack of control: Investors have limited control over specific investments made by the fund manager.
  3. Market risk: The value of mutual funds can go up and down, just like the stock market. This means that you may lose money if you invest in a mutual fund.
  4. Possible underperformance: The fund's returns might not always beat the market or meet your expectations.
  5. Complexity: Mutual funds can be complex, and it can be difficult to understand their risks and fees. This can make it difficult for investors to make informed decisions.
  6. Limited access: ELSS and some other funds have lock-in periods, restricting your ability to withdraw funds before a set timeframe (typically 3-years). Early exits may incur exit load fees.
  7. Tax implications: While mutual funds simplify trading, dividends generated from selling securities within the fund are taxable. These distributions are taxed based on holding period (short-term vs. long-term capital gains), potentially leading to unexpected tax bills. Investors in high-tax brackets should be particularly mindful.
  8. Fund manager risk: Fund managers' decisions might not always be purely analytical. Short-term bets can impact performance, and their departure from the fund house can also affect your investment.
  9. Over-diversification: While diversification is a core benefit, excessive diversification can inflate operational costs, reducing the chance of high returns from individual stocks.
  10. Uncertain returns: Mutual funds do not offer guaranteed returns. Their value is reflected in the Net Asset Value (NAV), which fluctuates daily. A dip in NAV after your investment translates to a loss on your principal amount.
  11. Limited control: Investors have no say in where the fund manager invests. While you can access disclosure documents, the ultimate decision to buy specific stocks rests with the manager.
  12. Past performance is not predictive: A fund's past performance doesn't guarantee future success. Analyse the fund house's investment philosophy, transparency, and overall performance over a longer period.
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Frequently Asked Questions

Are Mutual Funds Better Than Stocks?

Mutual funds and stocks serve different purposes in a diversified portfolio; the choice depends on individual goals and risk tolerance.

What is the main advantage of mutual funds?

The main advantage of mutual funds is diversification, allowing investors to spread risk across various assets and benefit from professional management.

Is mutual fund a good investment or not?

Mutual funds may be a good investment for those seeking diversification, convenience, and professional management, but it's essential to align them with your financial goals.

Are mutual funds risky or not?

Mutual funds carry risks inherent to the underlying assets they hold, but the level of risk varies depending on the fund's asset allocation and investment objectives.

What is downside in mutual funds?

Mutual funds have downsides like potential for depreciation in share value, expense ratios that eat into returns, and lock-in periods for some schemes.

Can mutual funds lose value?

Yes, mutual funds can lose value. Their performance is tied to the underlying investments, which can fluctuate due to market movements or economic conditions.

Why don't people invest in mutual funds?

Some people avoid mutual funds due to a lack of control over investments, concerns about fees, or a preference for simpler investment options like fixed deposits.

How many Indians invest in mutual funds?

The exact number of Indians investing in mutual funds is constantly changing, but industry reports suggest it's in crores.

What is the biggest problem with mutual funds?

One of the biggest drawbacks of mutual funds is high fees. These fees, which include expense ratios and trading costs, can significantly impact your investment returns over time.

What are two risks of mutual funds?

Two significant risks associated with mutual funds are:

  1. Market risk: The value of your investment can fluctuate based on overall market conditions. A market downturn can lead to losses in your portfolio.
  2. Manager risk: The performance of your mutual fund is heavily influenced by the investment decisions of the fund manager. If the manager makes poor investment choices, it can negatively impact your returns.
Is there a penalty for withdrawing money from a mutual fund?

Yes, there can be a penalty for withdrawing money from a mutual fund, known as an exit load. This is a charge imposed by the fund house on investors who redeem their investments before a certain period. Exit loads are typically designed to discourage short-term investments and encourage long-term investing.

Can mutual funds be negative?

Yes, mutual fund values can go down. Here's why:

  • Market Fluctuations: The underlying investments of a mutual fund (like stocks or bonds) are subject to market fluctuations. When the market falls, the value of the fund's holdings decreases, resulting in a negative return for investors.
  • Poor Fund Performance: If the fund manager makes poor investment decisions, the fund's performance can suffer, leading to losses for investors.

It's important to remember that negative returns are a normal part of investing in the stock market. Historical market data shows that over the long term, the stock market tends to go up. However, there will be periods of volatility and potential losses.

If you're concerned about negative returns in your mutual fund portfolio, it's advisable to consult with a financial advisor to review your investment strategy and risk tolerance.

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Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.