Taxes
The tax ramifications of actively managed mutual funds for individuals are considerable. By law all mutual funds are required to distribute 95% of their income to their investors each year. That means mutual funds will give their investors the vast majority of the capital gains, dividends and interest they've generated each year. While this sounds good at first glance, these distributions represent taxable events. Investors will pay taxes on them regardless of whether they have chosen to receive the distributions or have them automatically re-invested.
Moreover, as all too many investors have experienced over the last few years, many mutual funds have been forced to liquidate holdings in order to meet redemptions. After a certain point, these liquidations force the mutual fund manager to sell stocks and thus create more capital gains. This leads to the unfortunate situation of a mutual fund being forced to distribute capital gains even though the NAV (or price) of the fund has actually gone down that year. More than a few investors have called their mutual fund companies complaining of an "obviously inaccurate" 1099 form, only to learn that the form was indeed accurate.
The best way to avoid the tax implications of actively managed mutual funds is to own these types of funds in tax-deferred accounts, primarily 401k's and IRA's. These accounts have maximum contribution limits, however, and most investors eventually exceed these limits and open brokerage accounts. Investors should endeavor to place index funds or individual stocks in these accounts, as the tax ramifications are much less burdensome with these vehicles.
