Arguments Against Investing in Traditional Mutual Funds

By Stock Research Pro • March 17th, 2009

A mutual fund is simply a pool of money that is invested and managed for the benefit of the funds shareholders. Depending on the objective of the fund, a mutual fund might invest in stocks, bonds or cash or a combination of these in an effort to bring the greatest possible return to its investors. Each mutual fund investor owns a portion of the fund and participates in any increases or decreases in the value of the fund. There are many arguments to support mutual fund investing, including instant diversification, professional management and cost efficiency, there are also a number of arguments against investment in traditional or “actively managed” funds which should be considered.

Fees and Expenses: The fees and expenses associated with traditional mutual funds can put a significant “drag” on your portfolio

The basics of no-load mutual funds

Growth Limitations: It can be difficult to achieve exceptional growth from a mutual fund because the high-performing securities are often weighed down by the rest of the portfolio. This over-diversification is a major argument against mutual funds by investors who prefer to purchase individual stocks.

Loss of Control: Many investors like to function as entrepreneurs in building and managing their portfolios. Investors in mutual funds turn that control over to the fund manager.

“Survivorship” Impact on Reported Performance: Because mutual fund management companies tend to eliminate the poorly performing funds very quickly, they can skew their overall reported returns.

The Institutional Imperative: There is a known tendency for mutual fund managers to adopt a “herd mentality” in constructing and managing their portfolios. For this reason, funds with similar investment objectives will often see similar results.

Victims of their Own Success: Over the long-term, investors tend to pour money into the most successful funds. The managers of these funds can then have more money than they can profitably invest, driving down the performance of the fund.

More about mutual fund concerns


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.


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