• Mutual funds are a type of investment that diversifies stock holdings across a wide body of stock types. When investors place funds in a mutual fund, the managers of that fund distribute the money and buy various stocks for those investors. Mutual funds always have a particular focus, such as large cap funds, overseas funds, or large growth funds. This helps investors choose a fund that fits their particular investment plans. However, there are several problems with mutual funds that investors should be aware of.
  
  

Constrictive Guidelines

• Since mutual funds do have a particular focus, the managers of the fund are bound by that focus. It is written in their prospectus, the laws that govern the behavior of the fund. This means that even if the stocks and bonds that the mutual fund focuses on are doing badly and others are doing well, the managers have no choice but to invest in the stocks that are doing poorly, losing their investors money.
  
  

Investor Decisions

• Mutual funds are also controlled by investor decisions. For instance, when the investor sells shares of the mutual fund, the manager has to sell stocks if the fund does not have enough cash to cover the sale. Investors tend to sell when the market dips, so managers are forced to sell stocks that the fund would actually profit by if they held onto the stocks instead.
  
  

Tax Problems

• Mutual funds are taxed based on the activity of the fund, not the activity of the investor. This means that an investor can invest is a mutual fund that is just about to pass on taxes, or at a time when the fund manager is making profit by selling certain profitable stocks, then the investor will be taxed heavily for profit that actually had no direct significance.
  
  

Fees

• Fees are included in all mutual funds. Some fees are front-loaded and occur when investors buy mutual fund shares, meaning they are actually investing less overall. Funds may also charge back-loaded fees for investors who sell stocks. Most funds include an expense fee every year based on profits. These fees can add up and be annoying for investors.