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What are the disadvantages of Mutual Funds?

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Despite the potential advantages offered by mutual funds, there are several negative factors you should consider before investing in a mutual fund. The list below is not exhaustive, but it is interesting to note the double-edged nature of some of the advantages of the mutual fund:

Professional Management: As noted above, a good fund manager can relieve much of the stress of investing. However, when considering a mutual fund it�s important to remember that you�re placing your money under the day-to-day control of someone else. Obviously, a poor fund manager can make a mutual fund a poor investment choice.
Overdiversification: Diversification is usually a good thing because it reduces risk, but mutual funds sometimes make small investments in so many securities that they become overdiversified. In other words, the mutual fund�s holdings in each security may be so small that it is difficult to realize a substantial return from any of those holdings, which in turn means that the overall return for each investor is small.
Unused Cash: The constant availability of shares is certainly convenient for investors in a mutual fund, but it can also operate as a disadvantage. A mutual fund manager must always prepare for the possibility than an investor will cash in his or her shares. As a result mutual funds must maintain a ready cash supply at all times, which means that your cash may occasionally serve as liquidity insurance rather than work for you as an investment.
Fluctuating Returns: Although fixed-return funds offer a potential exception, mutual funds usually have no guaranteed return. The funds thus rise and fall with the fortunes of the securities in which the fund has an interest, so the value of your shares may routinely fluctuate.

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