Why Exclude Mutual Funds from Your Investment Portfolio?

Investing in mutual funds is often touted as a smart and easy way to diversify your investment portfolio. However, while mutual funds can offer certain benefits, they also come with a number of drawbacks that may make them less than ideal for some investors. In this article, we will explore some of the reasons why you might want to exclude mutual funds from your investment portfolio.

High Fees and Expenses

One of the main reasons to consider excluding mutual funds from your portfolio is the high fees and expenses associated with them. These can include management fees, distribution fees, and other expenses that can eat into your returns. In fact, according to the Investment Company Institute, the average expense ratio for mutual funds was 1.25% in 2019. This means that for every ,000 you have invested, you could be paying 5 in fees each year.

Lack of Control

Another reason to avoid mutual funds is the lack of control you have over your investments. When you invest in a mutual fund, you are essentially handing over your money to a fund manager who decides what to invest in. This can be problematic if you have specific investment preferences or if you want to avoid certain sectors or companies.

Less Tax Efficiency

Mutual funds can also be less tax efficient than other investment options. This is because when a fund manager buys and sells securities within the fund, it can trigger capital gains taxes. These taxes are then passed on to the fund’s shareholders, even if they haven’t sold their shares. This can result in a higher tax bill for you.

Underperformance

Finally, many mutual funds fail to outperform the market. According to a report by S&P Dow Jones Indices, over a 10-year period ending in 2019, 85% of large-cap fund managers failed to outperform the S&P 500. This means that you could potentially achieve better returns by simply investing in a low-cost index fund or ETF that tracks the market.

Conclusion

While mutual funds can offer diversification and professional management, they also come with high fees, lack of control, less tax efficiency, and potential underperformance. Therefore, it’s important to carefully consider these factors before deciding whether to include mutual funds in your investment portfolio. As always, it’s recommended to consult with a financial advisor to make the best decision for your individual circumstances.