Mutual Funds – Everything But Mutual

These fees range from 0.25% to 1%, which will compensate for answering your questions, if you had any, and advice. It does not come out of your pocket, but this fee is very important. You need to know if your sales representative is receiving a trailer fee because he or she may not be trying to sell you a particular fund because it is a good investment with a high rate of return, but perhaps it will gain more income for the representative themselves. This obviously should be illegal, but it is impossible to enforce. Once again, another reason of why mutual funds are a crime.

All of these fees, and many others, cut into your potential gain on your investment. However, there are other reasons why it can be considered a poor investment. On top of these fees, there are other disadvantages that are significant.

For one, returns are not guaranteed. You will not know how much money you will gain or lose and the funds are not covered by insurance as opposed to a savings account. Secondly, they are not designed for short term investors. As many people know, stock markets go through a business cycle with ups and downs. Mutual funds are designed for long term investors if they want to profit, as well as the fact that fees may be charged for liquidating them prior to maturity. Third, mutual funds have tax consequences depending on an individual’s situation. You may still end up paying taxes from your mutual funds even if it loses money.

Furthermore, mutual funds cannot short sell. Therefore in a down trending market, like the one we had recently, you will lose money. It will be inevitable. It is illegal for mutual funds to short stocks, which is when you profit when a share price goes down. Lastly, the sales representatives are human. Some human individuals are greedy and will do whatever it takes to benefit themselves as opposed to you. They may also make mistakes which has happened many times in the past and therefore can jeopardize your life-savings, depending on how much you invested.

How much do these “professionals” know anyway? Most mutual fund company’s holdings include businesses from the S&P/TSX 60 index. This means that an individual who would like to invest in stocks could purchase the index, or create a portfolio similar to a mutual fund’s portfolio, without having to know anything about stocks. Less than half of the Canadian mutual fund companies produce a higher rate of return than the index and therefore purchasing the index is a much better alternative. Anyone, even busy individuals who would like to invest, will be able to do so without a lot of work and avoid the expenses that come with mutual funds. ETFs (exchange-traded funds) are another alternative to mutual funds. They are a whole topic on its own, so I will be covering this on a different day.

As a final point, diversification is useful for those who want to preserve wealth, hence those who have a large sum of money. Because of the expenses occurred when purchasing a mutual fund is percent based, it will cost a wealthy investor more money. On the other hand, diversification will not benefit an investor not as wealthy that greatly.

As evident throughout this, I believe that mutual funds are a crime. It is also an act of being treated unfairly. Do you currently own mutual funds? Do you agree or disagree with my point-of-view? Let me know via comments!

Oh by the way, did you know that mutual fund sellers have their own saying?