Mutual funds
have their drawbacks and may not be for everyone:
- No Guarantees: No investment is risk free. If the entire stock market
declines in value, the value of mutual fund shares will go down as well,
no matter how balanced the portfolio. Investors encounter fewer risks when
they invest in mutual funds than when they buy and sell stocks on their
own. However, anyone who invests through a mutual fund runs the risk of
losing money.
- Fees and commissions: All funds charge administrative fees to cover their
day-to-day expenses. Some funds also charge sales commissions or
"loads" to compensate brokers, financial consultants, or
financial planners. Even if you don't use a broker or other financial
adviser, you will pay a sales commission if you buy shares in a Load Fund.
- Taxes: During a typical year, most actively managed mutual
funds sell anywhere from 20 to 70 percent of the securities in their
portfolios. If your fund makes a profit on its sales, you will pay taxes
on the income you receive, even if you reinvest the money you made.
- Management risk: When you invest in a mutual fund, you depend on the
fund's manager to make the right decisions regarding the fund's portfolio.
If the manager does not perform as well as you had hoped, you might not
make as much money on your investment as you expected. Of course, if you
invest in Index Funds, you forego management risk, because these funds do
not employ managers.