Disadvantages of Mutual Funds

• Professional Management - Did you notice how we qualified the advantage of
professional management with the word "theoretically"? Many investors debate
whether or not the so-called professionals are any better than you or I at picking
stocks. Management is by no means infallible, and, even if the fund loses money,
the manager still takes his/her cut. We'll talk about this in detail in a later section.

• Costs - Mutual funds don't exist solely to make your life easier - all funds are in
it for a profit. The mutual fund industry is masterful at burying costs under layers
of jargon. These costs are so complicated that in this tutorial we have devoted an
entire section to the subject.

• Dilution - It's possible to have too much diversification. Because funds have
small holdings in so many different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is
also the result of a successful fund getting too big. When money pours into funds
that have had strong success, the manager often has trouble finding a good
investment for all the new money.

• Taxes - When making decisions about your money, fund managers don't
consider your personal tax situation. For example, when a fund manager sells a
security, a capital-gains tax is triggered, which affects how profitable the
individual is from the sale. It might have been more advantageous for the
individual to defer the capital gains liability.