5 Limitations Of A Mutual Fund

5 Limitations Of A Mutual Fund

by Sumit Kati Last Updated: Mar 14, 2023 - 03:41 pm 205.5k Views

Every coin has two sides to it, but if it’s a coin from the movie Sholay, which Amitabh Bacchan used, then it’s a different story altogether. A lot of websites and articles have been telling us about how Mutual funds are the best available investment tools, but these have limitations, too. 

Lack of portfolio customization
Some brokerages like IIFL ,Motilal Oswal, offer Portfolio Management Schemes (PMS) to large investors. In a PMS, the investor has better control over what securities are bought and sold on his behalf. The investor can get a customized portfolio in case of PMS. On the other hand, a unit-holder in a mutual fund is just one of several thousand investors in a scheme. Once a unit-holder has bought into the scheme, investment management is left to the fund manager (within the broad parameters of the investment objective). Thus, the unit-holder cannot influence what securities or investments the scheme would invest into.

Choice overload
Over 2000 mutual fund schemes offered by 47 mutual funds – along with multiple options within them – makes it a difficult choice for investors. Greater dissemination of scheme information through various media channels and availability of professional advisors in the market helps investors to handle this overload.

No control over costs
All the investor's money is pooled together in a scheme. Costs incurred for managing the scheme are shared by all the Unit-holders in proportion to their holding of Units in the scheme. Therefore, an individual investor has no control over the costs in a scheme. SEBI has, however, imposed certain limits on the expenses that can be charged to any scheme. These limits, vary with the size of assets and the nature of the scheme is published by the mutual fund company.

Some mutual funds are too big to find enough good investments. This is especially true of funds that focus on small companies, given that there are strict rules about how much of a single company a fund may own. If a mutual fund has Rs. 5000 crores to invest and is only able to invest an average of Rs.50 crores in each, then it needs to find at least 100 such companies to invest in; as a result, the fund might be forced to lower its standards when selecting companies to invest in.

Dilution is the direct result of diversification. Since investors have their money spread across different assets the high returns earned does not make much of a difference. Thus, when we talk about diversification as one of the key benefits of MF, over-diversification could be one of the major disadvantages/limitation to investing in mutual funds.

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