Are mutual funds a bad investment?

Are mutual funds a bad investment?

It feels like there have been countless articles and studies written recently about why mutual funds are not very good investments. Whether it’s the high expense ratios charged, various hidden front-end and back-end load charges, the lack of control over investment decisions or diluted returns – investors have a lot to be wary of when it comes to investing in mutual funds.

Here are some of the factors to consider that will give you a sense of whether a mutual fund is a bad investment.

High Annual Expense Ratios

Mutual funds are required to disclose how much they charge their investors annually in percentage terms. A mutual fund’s gross return is reduced by the expense ratio percentage, which could be very high – in the range of 2 to 3%. Historically, the majority of mutual funds generated market returns. And excessive annual fees can make mutual funds unattractive investment, as investors can generate better returns by simply investing in broad market securities like low-cost index funds.

Load Charges

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

 

Lack of Control

And because mutual funds do all the picking and investing work for you, they may not be appropriate for investors who want to have control over their investment portfolios. Many mutual funds’ prospectuses contain caveats that allow them to deviate from their stated investment objectives, mutual funds can also be unsuitable for investors who wish to have consistent portfolios.

Returns Dilution

Mutual funds are heavily regulated and are not allowed to hold concentrated holdings exceeding 25% of their overall portfolio. Because of this, mutual funds tend to generate diluted returns, as they cannot concentrate their portfolios on one best-performing holding.