Over Diversification And Other Problems With Mutual Funds Investing

This site is quite positive on mutual funds investing in general. With this article I don't want to discourage you of investing. But every serious investor should know that the mutual funds are subject of some fundamental problems and investing in them may not always be the perfect solution for your financial goals.

So let's focus on some of these disadvantages.

Keeping Lots Of Cash

Mutual funds are bound to buy back your shares in short time should you decide to sell them out. This is great for you, but it means the mutual fund management should keep large amounts of cash at any time in order to satisfy such requests.

Keeping cash in place is good thing for diversification. The mutual funds however tend to overdo it, because of the these liquidity reasons. This means that large part of your investment is just sitting there and not making any profits. Therefore the ROI of the fund is lower than it could be.

Over diversification

Many mutual funds tend to overdiversify their portfolios. They are so concerned to protect their investors from big losses that they often spread the investments in too many different companies.

What does over diversification leads to? Well, simply said the funds can't beat the market or the market segment they are in. And even when market starts to fall, the fund prices will fall too. Too much diversification is similar to putting your investment in all the companies out there - you don't win more than the average.

The good mutual funds prefer quality over quantity and invest in a smaller portfolio of selected companies. Of course, this makes the risk higher.

Fluctuating returns

Because the mutual funds sell and buy shares to so many investors every day, their price always fluctuate and this is not always perfect reflection of the markets the fund invests in.

Fluctuation is something you should live with when investing in mutual funds, but it can be very irrtating especially for short term investors.

Too Many Investors In The Same Boat

Chances are you are not the only investor in your mutual fund. You are most probably not one of 100 neither one of 1,000. Most mutual funds have hundreds of thousands and even million investors. This means million of people investing in same company and same portfolio.

What if somehting goes wrong?

If for some reason the mutual fund company lose its reputation or something crashes in the target market, this will reflect millions of people. This leads to a second wave of negative effects and can even crash the local ecomony. Sounds scarry, but is pretty possible.

So what, should you not invest in mutual funds after thinking about all that was said above? I would say there is no reason for panic - you should be just a bit more careful when selecting mutual funds.

There are methods which can help you avoid the problems of the mutual funds. Expect more info on that at Mutual-Funds-Investing.info soon.

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