There are many Challenges Facing Mutual Funds which is of prime concern to the people who have an investment spree.
People find mutual fund investment so much interesting because they think they can gain high rate of return by diversifying their investment and risk. But, in reality this scope of high rate of returns is just one side of the coin. On the other side, there is the harsh reality of highly Fluctuating Rate of Returns. Though there are other disadvantages also, this concern of fluctuating returns is most possibly the greatest challenge faced by the mutual fund.
The Issue of Fluctuating Returns
In spite of being a diversified investment solution, mutual funds investment in no way guarantees any return. If the market prices of major shares and bonds fall, then the value of mutual fund shares are sure to go down, no matter how diversified the mutual fund portfolio be. It can be said that mutual fund investment is somewhat lower risky than
Direct Investment in stocks. But, every time a person invests in mutual fund, he unavoidably carries the risk of losing money.
The Other Challenges
- Diworsification or Over Diversification- In order to diversify the investment, many times the mutual fund companies get involved in Over Diversification. The risk of holding a single financial security is removed by diversification. But, in case of over diversification, investors diversify so much that many time they end up with investing in funds that are highly related and thus the benefit of risk diversification is ruled out.
- Taxes-Every year, most of the mutual funds sell substantial amount of their holdings. If they earn profit by this sell, then the investors receive the Profit Income. For most of the mutual funds,the investors are bound to pay taxes on these incomes, even if they reinvest the income.
- Costs- Most of the mutual funds charge Shareholder Fees and Fund Operating Fees from the investors. In the year, in which mutual fund fails to make profit and the investors get no return, these fees only blow up the losses.