While it’s true that Mutual Funds are popular investment vehicles, they may not always be the best fit for your portfolio. There are many disadvantages that come with mutual funds and you may want to consider other assets for your investment strategy. Assets like ETFs.
1. Investment Complexity
When you buy or sell mutual funds, you are making multiple trades at multiple prices. If you are trying to accomplish a particular investing goal with a mutual fund, targeting a certain price through your transactions can get very complex. It’s not as easy as buying a simple asset like an exchange traded fund. For ETFs it‘s one price, one transaction. With mutual funds it’s multiple trades, multiple transactions.
2. High Fee Structure
In conjunction with the trading complexity of mutual funds comes the associated costs. Multiple trades translate into multiple commissions and management fees. Not to mention the advisory fees. With an active mutual fund portfolio, the investing costs can add up rather quickly.
3. Lack of Liquidity
Yes, there are a lot of different mutual funds in the investment world, but that doesn’t necessarily mean they are very liquid. With mutual funds, the final transactions aren’t complete until the end of a trading day. It’s not until the final bell when you actual know the price of trades for the fund as a whole. That creates difficulties on days when the market is a volatile time-bomb. You need instant information in order to adjust your trading strategy. Mutual funds do not offer that option.
4. Tax Disadvantages
Mutual funds are not the most tax-friendly investment in the world. Capital gain taxes are incurred as the shares within the mutual fund are traded during the life of the investment. Compare that to the tax advantages of ETFs, which only incur capital gains taxes when the exchange traded fund is sold.
5. Lack of Transparency
There is a lack of information when it comes to mutual funds. What you are buying (or selling) within the fund is not always transparent and some information is even delayed. This creates a challenge when you need fund information to make investment decisions.
6. Transfer Difficulties
Complications arise with mutual funds when a managed portfolio is switched to a different financial firm. Sometimes the mutual fund positions have to be closed out before a transfer can happen. This can be a major problem for investors. Liquidating a mutual fund portfolio may increase risk, increase fees and commissions, and create capital gains taxes.
While mutual funds have these disadvantages, there is some good news. Investments like ETFs do not fall prey to these shortcomings. If you want to take advantage of the many benefits of ETFs, it may be time to get started with exchange traded funds.