Top Reasons Why Some Mutual Funds Fail To Deliver

by Harry Shawn An Apt Solution for Online Presence

We often come across people saying mutual fund investments are of no good as they have had a really bad experience – their investments have backfired badly. Are you also one among st them? Have you lost money in mutual funds? It can’t be true that you have at once jumped into making an investment without any planning and preparation. Everybody tries to get prepared to the best possible extent so that they don’t end up regretting but it is very important to check whether your preparation is on the right track. There are certain things we often overlook or maybe we are not even aware of those things that may ultimately lead to a loss.

Here are some top most reasons why some mutual funds fail to deliver:

Past Performance

For any investment, it is wise to check out how the company has performed in the past. You may often find the performance graph to be quite good but do you pay attention to the duration of the performance? Well, that is extremely important. Funds may have performed excellent for 3 to 6 months but later, failed. So you should always check their performance over the last 5 to 6 years. That will give you a better picture of their past record based on which you can decide whether to invest or not. Unless you do it this way, it may result into loss.

Size of The Fund

Size of the fund refers to the amount that the fund manages. It may seem like less important but it can affect you in an indirect way. Suppose you want to redeem the money you have invested after a short period. Now the size of the fund will determine whether the fund will allow you to do so or not. A small sized fund may not allow you as they often get into liquidity crunch. There have many such cases in the past. However, with a large sized fund, you don’t have to face such issues.

Selecting The Wrong Fund

This is one of the most common factors that leads to massive failure. There are various types of funds with varied options. Some are equity, some are debt funds, some may be active or passive. With so many options, it often becomes difficult to choose the right one for you. So while investing, never be in a hurry. Take your time, think about your goal like why you actually want to invest – child’s higher studies, daughter’s wedding, buy a house or a car.. Long term investments are often better as they bring good returns. So in such cases, you can choose to invest in an equity fund. Whatever it be, your choice of the fund should always be in accordance with your goal.

High Fees

There are still many ongoing debates on mutual fund expenses. Funds actually charge fees through what we know as the expense ratio which varies from fund to fund. If you ask why it varies, the answer can be very confusing as there are a various factors that determine a funds expense ratio. Usually it varies from 0.5 to 2.5 %. The fund uses the expense ratio for paying commissions, management fees and meeting its ad expenses. Generally it is recommended that you should not pay high mutual fund fees although at times higher fund fees are justified – but not always. So before you invest, this is a big deciding factor whether or not you want to pay high fees for a particular fund and why.

Fluctuating Market Conditions

Market condition is something that you cannot always correctly anticipate. Here market means stock market for equity funds and interest rate market for debt funds. Today the market is shinning and seeing this you venture into an investment, but in a year, the scenario may turn upside down. So you never exactly know what to expect. You might have chosen the best fund option in the best company, but market fluctuations can still let you down. Even the best fund options also sometime fail to stand the test of time but - do not always get prompted to redeem the money instantly. With a well-planned investment, you don’t have to panic much. Such market fluctuations are common and short-term, so just have patience.

Tax-ability

Taxation of mutual funds at redemption also matters a lot. Usually, equity funds are tax free if held for more than one year but if redeemed before one year, are changed 15% tax. Debt funds are taxed with 10 to 20% if redeemed after one year and if redeemed before one year, they are taxed as per tax slab. These things significantly influence your ultimate return on the fund. Basically, the tax rules indirectly indicate that you should invest in long tern mutual funds and not short term.

The reasons discussed above are some very crucial aspects of mutual fund investments and should not be neglected at any cost. As I already mentioned in the earlier article, success in investments are all about how well planned you are, and how tactfully you deal with the situations and how wise you are at decision making. If all these things fall in the right place, you can definitely expect good returns on your investments.

For more details: @mergeralpha.com