It's difficult to keep track of the
investments an actively managed fund holds in its portfolio. A
fund is required to report its holdings only twice a year, and
trading goes on all the time. It's likely that the fund may
liquidate its position in existing investments and add new ones
several times between those reporting dates.
A fund may also buy an investment just before
it reports its holdings and sell immediately afterward. When you
don't have adequate information on what a fund owns, you're
running a risk — sometimes described as blind investing.
Diversification dilemma
Similarly, while mutual funds are typically
broadly diversified, you don't know at any given time if
the fund is heavily committed to a particular area of the economy,
or if it has significant assets invested in companies whose stock
you own in your individual accounts or even the company you work
for. To guard against this risk - known as blind diversification
— you may choose to invest in mutual funds that concentrate
in asset classes that you're not investing in on your own.
For example, if you own mostly large-company
stocks, you might choose mutual funds that invest in small or
mid-sized companies, or funds that stress value investments if
you're buying
blue chip stocks for your own portfolio.
