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Mutual funds have their drawbacks and
may not be for everyone:
- No Guarantees: No
investment is risk free. If the entire stock market declines in
value, the value of mutual fund shares will go down as well, no
matter how balanced the portfolio. Investors encounter fewer risks
when they invest in mutual funds than when they buy and sell stocks
on their own. However, anyone who invests through a mutual fund runs
the risk of losing money.
- Fees and commissions: All
funds charge administrative fees to cover their day-to-day expenses.
Some funds also charge sales commissions or "loads" to
compensate brokers, financial consultants, or financial planners.
Even if you don't use a broker or other financial adviser, you will
pay a sales commission if you buy shares in a Load Fund.
- Taxes: During a typical
year, most actively managed mutual funds sell anywhere from 20 to 70
percent of the securities in their portfolios. If your fund makes a
profit on its sales, you will pay taxes on the income you receive,
even if you reinvest the money you made.
- Management risk: When you
invest in a mutual fund, you depend on the fund's manager to make
the right decisions regarding the fund's portfolio. If the manager
does not perform as well as you had hoped, you might not make as
much money on your investment as you expected. Of course, if you
invest in Index Funds, you forego management risk, because these
funds do not employ managers.
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