Mind the Mutual Fund Missteps to Curb Losses

Mutual fund is a good investment for diversification since it is less volatile and less expensive than stock investing. Bearing those in mind, here are some of the common mistakes committed by investors when investing in mutual funds.

Choosing an Inappropriate Mutual Fund

Active funds and passive funds are the two kinds of mutual funds. An actively managed fund chooses securities to place in the fund. Conversely, a passively managed fund asset mirrors an index, with holdings remaining almost static. Passive funds levy lower fees than active funds.

Higher fees relative to an active fund or the commission paid to trade ETF shares may not matter to hands-on investors. But for people who seek passive income, go with lower cost index fund to save money. Index funds are essentially designed to match the performance of an index they follow.

Excluding the Taxes in the Equation

Funds incur federal capital gains tax on the following premises: shares of a fund are sold, the underlying investments are ditched, or a dividend is paid at the end of the year. The tax liability of an investor can escalate if they the fund has a higher turnover ratio.

You can own a fund with a lower turnover ratio or employ tax loss harvesting in order to further tax efficiency. Remember the IRS wash sale rule, which states a taxpayer is prohibited from claiming a loss on the sale or trade of an investment.

Minding Not the Cost

Expressed in percentage, expense ratio includes 12b-1 fees, administrative fees, management fees, operating costs, and other related expenses in overseeing the fund. A Morningstar data shows the average asset-weighted expense ratio among all funds was 0.64% in 2014. Not all funds are affordable. It pays to account the expense ratio and returns of the fund, or you are at risk of jeopardizing your other investments.


The investment is designed to balance the risk over several asset classes. While it is ideal to combine different securities, focusing too much of your holdings in one sector can increase your risk exposure. For instance, if you have too much stock holdings and they slump, there may be insufficient balance in your fund to counter its effect.