Why following a mutual fund portfolio is a bad idea.

Individual investor does not have all the access to the data which mutual funds have.So he might think it is a better idea to follow the portfolio of a mutual fund and there by get returns which are equal or more than the mutual fund returns.

But this strategy has more pitfalls then gains.Lets see what are the reasons for this.

1.Wider diversification.

Mutual funds have a diversified portfolio having around 30 to 50 stocks.Out of which some stocks may do good while others may fail.On average resulting positive returns to the fund.

Individual investor who tries to mimic the portfolio of a mutual fund , may not have the ability to maintain a diversified portfolio,who instead would choose only fewer stocks from the mutual fund portfolio.

To his bad luck if these are the stocks which have not done well ,then investor has to end up taking loses.

2.Incomplete information on portfolio.

Mutual funds shuffle their portfolio and it is not possible to gather information about the when they are changing the portfolio.They might be knowing a insider story and might sell a stock immediately knowing a bad news is in line.

Individual investor might find himself late catching the falling knife.By the time he knows the action taken by the mutual fund ,damage would have been done.

Hence it not a profitable idea always to mimic a portfolio of a mutual fund.Hence an individual investor can use the mutual fund information to find which stocks are hot and not among the mutual funds and can make a investment decision.

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