• Mutual funds are a viable investment option for many investors seeking to grow assets over time without extensive research and monitoring of daily investment news. With billions of dollars invested in thousands of fund options, millions are convinced of the strong benefits of mutual funds. As with all things, there are also negatives to consider.
  
  

Mutual Funds are Not Insured

• Mutual funds are investments that fluctuate in value with no performance guarantees. Investors study past performance, seeking funds with long-term positive histories, but history does not always predict future results. Managers retire, get fired or move on to better opportunities. Markets have negative cycles. These all affect fund performance. Mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC), unlike bank accounts, and have no federal insurance covering anything except fraud.
  
  

Investors Give Up Control

• When an investor has a portfolio of stocks and bonds, control over the portfolio is retained. The investor follows the securities owned and makes adjustments based on news, research and adviser input. When an investor places money into a mutual fund, this control is relinquished to the mutual fund manager, who chooses the stocks and bonds that fit the collective objective of all the fund investors. Investors are unable to remove one or two stocks they have objections to.
  
  

Mutual Fund Taxes are Confusing

• Most mutual funds are taxable funds investing in stocks and bonds. However, some funds are touted as tax-free investments. When investors realize that a capital gain occurred and they must pay taxes on it, things get complicated. Using a tax-free municipal bond fund as an example helps illustrate the problem. Municipal bonds are tax-free investments sought by investors in high tax brackets for tax-free income. The bond's yield is tax free. The problem is if a manager needs to sell a bond at a premium (more than it was bought for), a capital gain occurs on the bond. This happens with individual bonds bought by consumers, too. So a consumer may never sell the fund and take only interest as income, but owe capital gain tax at the end of the year.
  
  

Investors are Not Aware of Fees

• Mutual funds are always in the news and most everything about them revolves around percentages. Rates of return are given in percentage increases or decreases. Past history is averaged. Fees are a percentage of assets under management. Investors must learn to decipher the percentage structures to fully understand fund performance. Investors need to consider a rate of return net of annual fees. Keep in mind that fees are assessed regardless of what the market does, so even when the fund performance is negative, the fees are still assessed for management. Full fee breakdowns are found in the mutual fund prospectus.