Dilution: Even though diversification reduces investment risk it dilutes returns. A mutual fund is a portfolio of number of assets. So the returns of a fund are the average return of securities in the portfolio.
Management Fees: Some part of our investment (usually 1% to 2% annually) goes towards the management fees. Apart from this there are sales commissions and redemption fees.
Note: As per the recent SEBI directive entry load is waived off even if our buy order goes through a dealer/broker.
No Guaranteed Returns: Returns from mutual fund investments are not guaranteed though they are managed by professionals. Most of the mutual funds don’t beat their benchmarks.
No Control Over Decisions: We don’t have any control over the investment decisions. The manager takes all decisions on securities buying and selling.
Regulations: Though strict regulations are to ensure safety of investor’s money they don’t allow free trading which may result in less returns. I will try to cover SEBI general rules on mutual funds in coming posts.
Inefficiency of Cash Reserves: Mutual funds maintain huge cash reserves to meet redemptions at same time. These cash reserves could be a combination of cash in bank, cash equivalent highly liquid money market instruments. So some part of the money is inefficient which could have been invested to get more returns.
Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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hi plz give some thought on demerites of india