If you are considering investing in mutual funds in Asia, but are scared of doing so because you’ve heard about the risks involved, here are ten risks associated with investing in mutual funds that you should consider before making your final decision.
Capital loss
If you’re thinking about investing in a mutual fund, then there is no doubt that your end goal is to make money by increasing your investment over time. But while some may tell you that ” past performance does not guarantee future results “, this is not entirely true. Of course, you can’t guarantee that your fund will beat the market every year, but it’s still possible that they will do so in specific years.
Fees
While there is no such thing as an utterly fee-free investment vehicle (we’re looking at you NEST Pensions), mutual funds are up there with having some of the highest fees around.
Transparency
If you’re working in a job that offers stock options, then you’ve probably seen all sorts of graphs and charts used to predict how much money you’ll make from investing in specific companies and when they will be profitable enough for your stocks to turn into cash.
Performance
It’s not uncommon for mutual funds to underperform their benchmark index (the average return achieved by all components of an investment portfolio) even after considering high fees, which eats into investor returns.
Taxation
If you’re like most people, you probably had no idea that there would be some form of taxation whenever you attempted to cash out your investments (maybe excluding certain exceptions like pensions and ISAs). While this isn’t necessarily a big problem if you only make small profits here and there, this could become problematic if you start making significant gains on your investments without paying tax.
High Fees
Wait, didn’t we say that high fees eat into returns? Not only do mutual funds have increased costs as their primary method of generating revenue from investors, but they also charge annual management charges, which can run up to 1% of the amount under management. It’s not uncommon for mutual funds to also charge transaction fees based on the number of times the fund buys and sells assets (e.g., a buy and sell would be counted as two transactions).
Liquidity
Mutual funds cannot withdraw assets until it reaches maturity or is sold by the fund manager. It’s one of many reasons why buying an ETF (Exchange-Traded Fund) is preferred over mutual funds as they can be traded at any time with nominal fees, making them more liquid than traditional markets.
Ethics
Investing isn’t always about earning massive returns on your money; sometimes, people put their capital into places they believe in, such as charities or environmentally sustainable initiatives. Unfortunately, you risk paying high fees if you go down this path because most mainstream mutual funds aren’t held to ethical standards meaning you’re unlikely to get a positive return on your investment.
Capital Gains Tax
Individuals must pay capital gains tax on their profit when selling assets such as stocks, commodities, and other tradable belongings. These taxes can be substantial if you don’t plan accordingly, which is why some people prefer to buy ETFs that track indices like the FTSE 100 or S& P 500 due to their meagre fees. Despite this, many countries have different taxation rates for different types of assets.
Transparency
This risk is more applicable to investors of ETFs as opposed to mutual funds, but it’s worth mentioning. There have been many cases of so-called experts accused of insider trading or market manipulation. They’ve used their privileged position and knowledge about stocks and commodity prices for personal and professional gain.
After learning all the risks involved with mutual funds, are you ready to start trading? Check out Saxo Bank today for more info!
