You should research mutual funds before making an investment. Which money should you use? Will you opt to employ individual stocks and bonds, closed-end funds, ETFs, or mutual funds? Let's examine a few alleged drawbacks of mutual funds and discuss ways to prevent them.
Main points
- Some alleged drawbacks of mutual funds are untrue or don't apply to all funds.
- For instance, "hidden fees" must be disclosed in the prospectus of a mutual fund. However, not all mutual funds impose these fees.
- Waiting until market closing for mutual fund order executions may annoy investors who prefer the flexibility of ETFs.
- There are ways to avoid capital gain distributions, such as selling a mutual fund beforehand and tax-loss harvesting.
1. Mutual Funds with Hidden Fees
If fees were hidden, they would undoubtedly be included as a disadvantage of mutual funds.The so-called "12b-1 costs" are what are actually known as hidden fees. Although paying these fees is unpleasant, they are not secret. On the websites of the mutual funds, the charge is listed in the prospectus for the mutual fund. A 12b-1 fee is typically not charged by mutual funds. If you find the 12b-1 fee onerous, invest in a mutual fund that does not impose the fee.2. Lack of Liquidity in Mutual Funds
In comparison to ETFs, equities, and closed-end funds, how quickly can you receive your money if you sell a mutual fund? You normally have access to your money on the day after you sell a mutual fund. You must wait two days after selling an investment in ETFs, stocks, or closed-end funds. 1. Mutual funds don't have a "lack of liquidity" problem, as some people claim.3. Mutual Funds Charge Exorbitant Sales Fees
Should the list of drawbacks for mutual funds include a sales charge? With so many no-load mutual funds available, it might be challenging to justify paying a sales fee. However, given Since there are thousands of mutual fund options available without sales costs, it is difficult to argue that a sales charge is a disadvantage of mutual funds. The list of drawbacks of mutual funds does not adequately address sales expenses.4. Poor Trade Execution in Mutual Funds
Regardless of when you place the order to purchase or sell the mutual fund, the transaction will take place at the closure of the market. Mutual fund trading can be a straightforward, stress-free component of the investment framework. However, a lot of proponents and sellers of ETFs will point out that you can trade with them all day long. If you want to invest in ETFs rather than mutual funds, you can have your order filled at 3:50 p.m. EST and receive prices as of 4:00 p.m. EST for the ETFs.5. Mutual Funds Pay Out High Distributions of Capital Gains
The list of drawbacks of mutual funds would be complete if all mutual funds sold holdings and distributed capital gains to investors as a taxable event. However, not all mutual funds distribute capital gains on a yearly basis. These distributions are not made annually by tax-advantaged and index mutual funds. Yes, they must disburse the gains to shareholders if they have them. Additionally, distributions of capital gains have no effect on retirement plans (such as IRAs and 401ks). Tax-loss harvesting and liquidating a mutual fund before a payout are two further methods for avoiding capital gains distributions.The conclusion
Similar to how there are benefits and drawbacks for every type of investment vehicle, mutual funds have both. However, if you come across a list of the drawbacks of mutual funds, carefully examine it to see if each one pertains to mutual funds in general or to a specific case (or to investment vehicles as a whole, regardless of the structure).