When people think of investing for their retirement and financial future, they tend to think of investing in terms of good investments and bad investments — but in reality, all investment strategies have their pitfalls. Sure, mutual funds are known to carry fewer risks than volatile stocks, but there are some caveats associated with investing in mutual funds.
In today’s blog post, P.A. Berg Retirement, your local Chicago-area investment advisors, will be discussing the five pitfalls of mutual funds. Continue reading to learn more.
Disadvantages of Mutual Funds
If there is one thing that people hate more than anything, it is hidden fees. And yes, mutual funds have them too. Hidden fees in mutual funds are most commonly publicly listed as 12b-1 fees. Contrary to the term “hidden fees,” 12b-1 fees are not actually hidden. They are almost always listed within the mutual fund prospectus and have been dubbed as “hidden” because most people simply do not look for them.
That being said, not all mutual funds have these fees. An investment advisor at P.A. Berg Retirement Solutions can easily help you to determine if the mutual fund that you are interested in has 12b-1 fees.
Lack of liquidity
When people think of investments they almost always think of ETFs, better known as exchange-traded funds like stocks. Mutual funds, however, are not as liquid as ETFs. Stocks and ETFs can be traded and sold almost instantaneously, but that is not the case for mutual funds. Mutual funds instead have a slight delay in trading and selling. Even if it is not much, it can be chalked up to be a disadvantage.
Some mutual funds might also have a sales charge at the time of purchase, meaning that the fund’s broker is compensated for a sales commission. There are also two main sales charges associated with mutual funds. First is the front-end load. The front-end load is a charge that is meant to lower the initial cost by offering breakpoints that are meant to push you to invest more — because the more you invest, the cheaper the sales percentage will be. Second, the back-end load is meant to encourage investors to hold on to their mutual funds longer, decreasing over time as you own shares of the mutual fund.
Poor Trading Execution
Some might argue that a pitfall of mutual funds is the timing in which they are traded. Unlike ETFs like stocks, mutual funds are traded once a day at 4 p.m. Eastern Time — after the market has closed. At this time trade orders can be ordered through a broker. Some people see this as a pitfall because it is a restriction on mutual fund trading.
High Capital Gains Distributions
If there is one disadvantage to mutual funds, it is that some of them have high capital gains distributions — meaning that the fund manager’s liquidation of underlying stocks and securities in the fund might cause the value of shares to decrease. While this is not common, it is worth having a registered investment advisor look into.
Let P.A. Berg Retirement Solutions Help With Mutual Funds
Mutual funds have some disadvantages, but overall they are rather beneficial to retirement portfolios — if the proper fund is invested in, that is. Let our team of registered investment advisors help you to determine if certain mutual funds are right for you. Request a free evaluation today!