Mutual Funds Are Money Traps Part-1
A mutual fund is simply a collection of stocks and bonds. These stocks and bonds are actively managed by a “professional” fund manager who takes a hefty yearly fee for his service. You might think that employing such an industry expert manager would be beneficial for the shareholder. Well you thought WRONG.
Over time 80% mutual funds will underperform the market due to their costs. There are a few funds how have consistently outperformed the index, but these are a handful. Even if they do manage to outperform the index they will always carry the remark in the fine print that “Past performance is no guarantee of future returns”. AMCs will draw up pretty graphs showing spectacular returns and happy faced catalogues to win your money.
Benefits of Mutual Funds:
• Diversification: Buying a mutual fund is like buying lots of stocks in a single basket. Diversifying risk.
• Liquidity: Mutual Fund units can be redeemed for cash at any given time upon request.
Disadvantages of Mutual Funds:
• Management: Yes, the management you employed to manage your holdings is one of the biggest banes of your returns. An average fund manager is no better than analyzing and investing than a non-professional. They also have fixed base salaries, so they have no interest in the long-term benefit of the shareholder. They more so run after their quarterly bonuses, sacrificing long term gains for short term solutions.
• Mandatory Restrictions: Restrictions placed in order to “protect the shareholder” actually makes him miss out on many investing opportunities that are outside a mutual funds mandate. Biggest of these are value buy situations, where a stock falls out of mandate of many mutual funds. Many fund managers like sheep also sell their holdings for no good reason.
• Dilution of profit: Over-diversification results in averaged out performance even from the best performing holdings of a mutual fund. This brings down returns.
• Costs: Mutual Funds have a plethora of complex costs and charges placed upon the naïve shareholder. These are the killing blow to mutual fund’s returns in the long run.
http://ghanishtnagpal.com/mutual-funds-money-traps-part-1/