Investing in MFs then consider these points

Investors in mutual funds should, however, be aware that investing in mutual funds does have a few disadvantages too. They must, therefore, do adequate research to minimize the impact of such negative factors.

Over Diversification

The fund may become very popular and attract lot on investments. Therefore at some point the corpus size may become too large vis-�-vis the investment opportunities available. The fund manager would, then be forced to invest in average stocks also, as he would have already reached the prescribed limits for the quality stocks.

Or the fund manager may take a cautious route and invest in much larger number of stocks than what is actually warranted for the purposes of diversification.

This can hurt the overall returns that the fund could have otherwise generated by limiting its exposure only to above-average stocks.

Higher concentration

Contrary to the above, it may also happen that the fund manager may take a much larger exposure to select industries, thereby exposing the fund to concentration risk.

If your risk appetite is low or possibly you have already invested in a few sector-specific stocks, then this particular fund may no longer be suitable to your overall investment pattern.

Idle Cash

All funds must keep some amount of the corpus in cash/cash equivalents to take care of the day-to-day redemptions. If this amount is large, it means that the fund is forgoing the opportunity to earn higher returns.

However, care must be taken to see whether this is a permanent feature of the fund or only a temporary phase. It is possible that the fund manager expects the markets to fall. Therefore, he might have booked profits by selling off a part the portfolio and is waiting for an opportune moment to re-enter the market at lower levels.

Fancy Names

Mutual funds have been marketing their funds under very fancy and catchy brand names. These could sometimes mislead the investor in understanding the real objective of the fund.

The investor, therefore, must read the prospectus to find out the exact nature of the fund and then decide whether it suits his investment objective or not.

Moreover, there could be a perception difference in what you believe the name stands for and what the fund's intention actually is.

Higher expenses

As compared to direct investing into equity, one has to generally pay a higher cost at the time of investing. Typically, brokerage for direct purchase could be about 1% maybe even less, whereas entry load in a mutual fund could be around 2.25%.

Second, in mutual funds one would have to pay on-going annual fund management charges of about 2.5%, which is nil if you have brought shares and these are lying in your demat account. Moreover, these fund-management expenses are payable even if the fund has failed to perform, which would further reduce your already below-normal profits or maybe even add to your losses.

Loss of control

When investing in a mutual fund, you are effectively handing over the charge of your money to a fund manager. You are, therefore, dependent on the fund manager's investment philosophy to generate returns for you. 

Some investors may not be comfortable with this kind of passive investing. They would rather like to be in full control of their investment decisions.

One must keep the above issues in mind, when investing in mutual funds. However, given the fact that the advantages of a mutual fund far outweigh these negatives, they are still the best alternative available.

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