By: Todd Shriber
Mutual funds are investment products that are often bundled with exchange traded funds and mutual funds. However, there are some important differences between these asset classes, and some of these differences highlight the downsides of mutual funds that investors should be aware of.
No change in holdings
One of the most obvious differences between, say. an actively managed mutual fund and a mutual fund might be one of the latter’s biggest drawbacks. Once a mutual fund is formed, its underlying holdings remain the same until the date of termination. It is an advantage if these holdings behave well, but if they lose value, the trusted investor ends up with a bag full of laggards and will lose money. Actively managed funds can transact in and out of various holdings. Mutual funds cannot, which puts investors at potential risk.
Investors should remember that while they may not pay for active management with mutual funds, the fees associated with these products are comparable to those of mutual funds. The downside here is that these fees are often much higher than what an investor would find with a passively managed index fund or an exchange traded fund. The higher the fees, the greater their impact on investor returns over time.
At first glance, the money put into a mutual fund does not appear to be a disadvantage to current fund investors. After all, new inflows into exchange-traded funds or mutual funds do not disadvantage current investors. Again, things are different with mutual funds. Entries into the trust may dilute the shares of the pie of existing investors. And the more confidence increases, the more limited the manager’s investment opportunities.
Only one way to buy
With individual stocks and exchange traded funds, investors have a myriad of ways to buy these securities. The investor can buy them through dozens of brokerage firms; it is only a matter of how much the investor is willing to pay in commissions. Mutual funds do not offer this level of convenience. These investments must be purchased directly from the issuer of the trust. The purchase prices are not competitive, and this is another disadvantage for investors.
Biography of the writer
Todd Shriber is a financial writer who began covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in the analysis of stocks, sectors and exchange traded funds. Shriber holds a Bachelor of Science in Audiovisual Journalism from Texas Christian University.