What are Limitations of Mutual Fund
- M Manohar Rao
- Jul 14
- 3 min read
Tags: Wealth Management, Investment Lesson, Mutual Funds, Mutual Fund Basics, Stock market, Budget, Finance, Investing, Personal Finance, Investment, ETFs, SIP, Multi cap
Lack of Portfolio Customization
Some brokerages and asset management firms offer Portfolio Management Services (PMS) to large investors. In a PMS, the investor has better control over what securities are bought and sold on his behalf. The investor can get a customized portfolio in case of PMS.
On the other hand, a unit-holder in a mutual fund is just one of several thousand investors in a scheme. Once a unit-holder has bought into the scheme, investment management is left to the fund manager (within the broad parameters of the investment objective). Thus, the unitholder cannot influence what securities or investments the scheme would invest into.
Choice Overload
There are multiple mutual fund schemes offered by several mutual fund houses and multiple options within those schemes which makes it difficult for investors to choose between them. Greater dissemination of industry information through various media and availability of professional advisors or mutual fund distributors in the market helps investors handle this overload.
In order to overcome this choice overload, SEBI has introduced the categorisation of mutual funds to ensure uniformity in characteristics of similar type of schemes launched by different mutual funds. This would help investors to evaluate the different options available before making an informed decision to invest.
No Control Over Costs
All the investor's money is pooled together in a scheme. Costs incurred for managing the scheme are shared by all the Unit-holders in proportion to their holding of units in the scheme. Therefore, an individual investor has no control over the costs in a scheme.
SEBI has however imposed certain limits on the expenses that can be charged to any scheme. These limits, which vary with the size of assets and the nature of the scheme, are discussed later. However, at the same time, it should be noted that the market forces also push the cost down, and there are many schemes that operate at expenses much lower than the limits allowed by the regulator. This aspect turns out to be advantageous for investors.
No Guaranteed Returns
The structure of mutual funds is such that—it is a pass-through vehicle and passes on the risk and return to the fund’s investors. That itself protects the interests of the investors. A mutual fund is not a guaranteed return product. It is just another way of managing money–except that instead of an investor–it is a professional fund management team that takes care of the funds invested. The performance of these investments impacts the returns generated by the mutual fund scheme. The deciding factors are: the movement of the specific market in which the money is invested, the performance of individual securities held and the skills of the investment management team. Out of these, the fund manager can work towards improving one’s skills, but the other factors are out of his control.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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