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The Limitations of Mutual Funds

Mutual funds allow investors to pool their money together to invest in a portfolio of securities managed by professional money managers. However, mutual funds have some limitations, as investors do not control investment decisions, fees reduce returns, and past performance is not indicative of future results. Mutual fund investments are also not insured by the FDIC and carry risk of loss depending on the types of securities in their portfolio.

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Saurabh Bansal
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292 views1 page

The Limitations of Mutual Funds

Mutual funds allow investors to pool their money together to invest in a portfolio of securities managed by professional money managers. However, mutual funds have some limitations, as investors do not control investment decisions, fees reduce returns, and past performance is not indicative of future results. Mutual fund investments are also not insured by the FDIC and carry risk of loss depending on the types of securities in their portfolio.

Uploaded by

Saurabh Bansal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The Limitations of Mutual Funds

A mutual fund is a pool of money from many investors that is used to invest in one portfolio of
securities for the benefit of all the investors in the fund. Mutual fund investors buy shares in the
mutual fund. Each share represents a piece of every investment made by the money managers
that oversee the mutual fund. Although mutual funds allow you to invest in many sectors of the
economy at once, mutual funds do have limitations worth considering before you invest.

1. Decisions
o Since mutual funds are professionally managed, you do not have any control in
how the money in the mutual fund is invested. Money managers are responsible for researching
and interpreting data related to the investments that make up the mutual fund. As a result, you
have no way of influencing what investments are bought and sold by the money manager.

Costs
o The returns you generate by investing in a mutual fund are limited in part by the
cost of maintaining the mutual fund. According to the U.S. Securities and Exchange Commission,
a mutual fund is similar to a business. The mutual fund incurs costs to buy and sell investments on
the open financial market place. Some of these fees may include advising fees, transaction
costs, and fees for marketing and distribution. These fees reduce the returns you make from the
investments in your mutual fund.
Projections
o A prospectus for a mutual fund is one of the most common sources of information
for investors. A key consideration when you examine a prospectus is that projections of future
earnings are only estimates of how the mutual fund may perform in the future. Projections are
commonly based on past performance, but there is no guarantee that a mutual fund will generate
the same level of returns as past years.

Insurance
o The money you invest in a mutual fund is not insured by the Federal Deposit
Insurance Corporation. If your bank participates in FDIC insurance, your deposits are repaid to
you if your bank fails, but the money you invest in mutual funds is not protected against
investment losses or bank closure.

Risk
o Mutual funds are exposed to risk like any other investment in the financial
markets. Mutual funds try to minimize risk by investing in an assortment of securities like stocks
and short- and long-term bonds. This strategy is commonly called diversification, and it protects
you from losses in one area of the portfolio with gains in another. While mutual funds invest in
several sectors, some specialize in certain investments like money market funds, bond funds and
stock funds, which carry additional risk of loss.

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