4 Cons of Owning a Mutual Fund

Should You Buy and Hold Mutual Funds?

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Learn about the real cons of investing in mutual funds. Getty Images

If you are a regular reader of the mutual funds site, then you may have read about the so-called disadvantages of mutual funds. But what are the real cons of owning a mutual fund - the cons that are not as easily avoided or are impossible to avoid?

Cons of Owning a Mutual Fund #1: There Are Too Many Choices

"Too much of a good thing" is a phrase that most of us can relate to in one way or another. If you are a mutual fund investor, you certainly can relate to this overused phrase.

And, unfortunately, not all of these mutual funds are "good things".

Wading through the wide variety of mutual funds on the market can lead some investors to simply not invest or choose the least risky alternative, which, according to some studies, will be "less favorable for their long-term financial well-being."

When investors are faced with choice overload, or what behavioral scientists might call bounded rationality, they see that there are too many fund choices, find it difficult to make investment decisions.

Cons of Owning a Mutual Fund #2: Past Performance Does Not Predict Future Performance

Regardless of your research efforts and/or what your mutual fund advisor projects, the past performance of your mutual funds are not a reasonable predictor of future returns. If it's an equity fund, a bond fund or a balanced fund, future performance may be volatile and not related to past performance.

Read advice from John Bogle regarding past performance: A Visit from John Bogle

Cons of Owning a Mutual Fund #3: Return of Principal Is Not Guaranteed

As soon as you accept that you cannot predict future performance of your mutual funds by looking at past performance, it's time to accept that a 100% return of your original investment is not guaranteed.

In other words, if you invest $1,000 of your hard-earned money in a mutual fund, there is no guarantee that your $1,000 will be available to you when you need it.

Mutual funds are not an exception to this lack of principal guarantee. ETFs, closed-end funds and UITs cannot promise a 100% return of principal.

Cons of Owning a Mutual Fund #4: Ongoing Research Is Required

It would be nice if you could buy a mutual fund and hold the fund for a lifetime. While some funds (think of target date funds) are designed to be held throughout your lifetime, it is unreasonable to expect that your investment profile (needs and goals) will remain the same. It's also unlikely that the fund you purchase will remain the same for eternity (e.g., managers change, investment styles drift, funds merge or are sold to other fund firms).

These various changes in investor's lives and changes within mutual funds require all of us to commit to ongoing research.

Avoid the Cons of Owning Mutual Funds

It's important to understand the cons of owning a mutual funds prior to making a decision to invest. Before you invest in a mutual fund, learn how you might avoid the pitfalls. And as with any personal decision, be sure that buying mutual funds suits your personal goals, tolerance for risk, and investment objectives.