Disadvantages of mutual funds

1. If there is a broad market drop, yourUnfortunately, sometimes you can also owe
fund’s value will dip with it. Thetaxes even if your fund lost money for the year.
diversification of most mutual funds protects youFor the time being, however, this is a non-issue, if
when one or several securities fall, but not whenfunds are held in a tax-deferred account such as
the whole market takes a downturn. The facta 401(k) or IRA.
that funds can fluctuate up and down, sometimes4. Record-keeping for tax purposes can be hard
wildly, is par for the course and should not deterwork. Investors who are not meticulous about
you from investing or scare you out of thekeeping track of fund purchases and sales may
market.end up paying higher taxes than are actually owed
2. There is no guaranteed rate of return withat the time of sale because of a miscalculation of
mutual funds as there is with CDs and Treasurytheir cost basis. This is the amount of your original
securities. Since risk is higher, the liklihood ofdeposit, plus additional contributions and reinvested
greater earnings is increased. You must alsodividends and capital gains.
expect investment performance to fluctuate.The amount of taxes you pay will vary depending
3. Unwanted taxable distributions can also be aon the method you use to calculate your gain or
disadvantage. Funds are required to pay out 98%loss (e.g., average price, first-in, first-out, or
of their dividends, interest, and capital gainsspecific identification). Thus, it is important to keep
annually. Taxes must be paid on theseevery annual statement for as long as you own
distributions, even if you never received them butthe fund.
instead reinvested them in additional shares.