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Disadvantages of mutual funds

1. If there is a broad market drop, yourthem in additional shares.
fund’s value will dip with it. TheUnfortunately, sometimes you can also
diversification of most mutual fundsowe taxes even if your fund lost money
protects you when one or severalfor the year. For the time being,
securities fall, but not when the wholehowever, this is a non-issue, if funds
market takes a downturn. The fact thatare held in a tax-deferred account such
funds can fluctuate up and down,as a 401(k) or IRA.
sometimes wildly, is par for the course4. Record-keeping for tax purposes can
and should not deter you from investingbe hard work. Investors who are not
or scare you out of the market.meticulous about keeping track of fund
2. There is no guaranteed rate of returnpurchases and sales may end up paying
with mutual funds as there is with CDshigher taxes than are actually owed at
and Treasury securities. Since risk isthe time of sale because of a
higher, the liklihood of greatermiscalculation of their cost basis. This
earnings is increased. You must alsois the amount of your original deposit,
expect investment performance toplus additional contributions and
fluctuate.reinvested dividends and capital gains.
3. Unwanted taxable distributions canThe amount of taxes you pay will vary
also be a disadvantage. Funds aredepending on the method you use to
required to pay out 98% of theircalculate your gain or loss (e.g.,
dividends, interest, and capital gainsaverage price, first-in, first-out, or
annually. Taxes must be paid on thesespecific identification). Thus, it is
distributions, even if you neverimportant to keep every annual statement
received them but instead reinvestedfor as long as you own the fund.



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