I had to cut some lettering recently for a customer. 1/2" MDF. I used a 1/4" bit. As you can see from the picture the corners of the "N" is where the issue is. The original is a letter comes to a point in that area. I'm just wondering why it would drill out that area like that?
Zoom in on the letter and look for breaks or overlapping. Hard to say without looking at the file though. Maybe try putting a fillet in that corner with a radius a little larger than the tool radius. Also, don't use cutter comp.