If some one ask me about mutual funds so i think there is many disadvantages that are frequently rarely discussed
- Taxation: mutual fund in a taxable account in late summer through October until after it declares Capital Gains. For instance, you may buy a fund in a taxable account in June but you have to understand you'll be liable for taxes generated by the fund for the entire year up to and including from the date of purchase. If the fund should drop in value, beware you may still be liable for capital gains taxes despite your loss.
- Lack of a defensive strategy: equity funds rely primarily on a "buy and hold" strategy that is most effective when the stock market is in a secular bull market. This has not been the case since 1999.chance of reaping gains in a choppy environment is difficult unless you the investor possesses a strategy to sell the fund when risk is high.
- Lack of input: This issue is of primary concern to Socially Responsible and Green Investors. Many S R I funds screen for as many social issues and will include a stock in its portfolio if is considered 'best of the lot". This issue was brought to the forefront during the Gulf Oil Spill when many S R I funds owned shares of B P,
- Relatively few stellar performers: funds do not exceed the return of their corresponding benchmark indices which is why Indexing has a place for many investors. As funds grow in size their performance tends to be diluted as assets grow.
- Specialized mutual funds: Bond funds, especially funds related to High Yield, Inflation Indexed Bonds and Convertibles are frequently either very expensive or difficult to buy individually on the open market. Hence using a mutual fund for this asset allocation tends to make a great deal of sense.
- Closed Ended Funds: periods of high market stress when sellers sell simply for the sake of it, many fund values will drop below their Net Asset Value. Buying closed end funds selling below NAV is frequently a very profitable and effective strategy as long as the underlying assets of the fund don't continue to drop below your purchase price.