Mutual Funds – The Costly Choice
The White Top View Series, Investment Choice begins our discussion of the most popular investment choices with mutual funds.
This Part 4 of the White Top View Series, Investment Choice discussing basic choices for investing. Links to all parts of the series are at the end of this post.
1 of 3 Big Investment Choices – Mutual Funds
Mutual Funds or 1 of 3 Big Investment Choices are very well established personal finance industry products. Clever Dutch financiers first created mutual funds in 1774! This brilliant pooled investing idea has been around for a long time!
Mutual funds pool capital from many small unsophisticated investors. Funds controlled, managed and invested by professional mutual funds are the most widely available financial security. Financial dealers, banks and mutual fund companies all create mutual funds as financial products to offer the public choices of every imaginable size and focus.
Stocks, bonds or a mix of both called combination or balanced funds are the possible focus of a fund. The marketers have a field day naming, positioning and spinning presentations of these products. Every imaginable slice, dice and angle gets covered.
Many Investors Begin With Mutual Funds
Mutual funds are the starting point for many investors. The managers of most funds use the pooled money to make large investments in large corporations. They also gain access to deals and opportunities unavailable to most small investors.
Broad and diversified or sharply and narrowly focused, mutual funds attempt to cover broad markets or concentrate investments in a specific country, industry, market or economic sector. They offer funds with portfolios that range from well diversified to very narrowly concentrated.
The typical mutual fund customer has modest amounts of money to invest and limited financial awareness. Typical mutual funds are very easy to buy with small amounts of money. There are thousands to pick from. Investors make purchases directly from mutual funds companies that create and run a particular fund or through a broker, financial advisor or at most banks, which also offer them as a product.
Mutual Fund Owners Get To Pay, Pay, Pay
As a group, mutual fund costs are greater than the costs of any other common investment product offered to the public. The industry has a long history of keeping significant costs, well obscured from investors. Alternatives include substantially more efficient and far cheaper funds and financial products that produce far greater net returns at absolutely no increase in risk.
Consider mutual funds as a financial condominium. You can own a unit or many units but you never own it all or actually control it. But, you get to pay all the direct operating costs. Plus, you pay management fees for the privilege.
Costs include everything. All transactions, maintenance, commissions, fees, slippage, margin, mistakes and any other cost or fee you can imagine gets taken. You also get to pay the bank or salesperson who sold you the fund. And you get to do all this again, year after year!
Mutual fund investors can actually end up paying for profit never seen. Results of action taken by either management or other investors can cost you. You may pay but see no benefit. The mutual fund structure actually carries obligations to pay all costs including mistakes and for actions taken by others that possibly never benefit you.
Mutual fund management fees themselves rank among the highest, particularly for Canadian funds. Some are over 3% and averages exceed 2½%! These management fees get taken even as other costs are in included the results! Even in a positive market, the net result for investors are often poor real returns.
Significant portions of the real costs are routinely obscured from the fund owners. The costs and fees can consume all or very often, most of the gains. Fund losses or down years are 100% borne by owners. The investor pays all including for all mistakes made by any party. All this and the most funds actually underperform the market!
Most galling, even leaving a fund can cost investors dearly. Deferred sales charges have devastated many accounts.
Costly Mutual Funds Remain Very Popular
Why are mutual funds so popular? It is all about the money. Everybody but the investor owner gets paid very well to sell and keep you in mutual funds. These products offer the salesperson “advisor” the highest fees. In my opinion, any advisor selling you mutual funds is not working in your best interest.
Fund companies are often excellent investments because they make so much money! That is good for shareholders and management, not so beneficial for those purchasing and paying for high cost products. Especially considering alternatives are readily available.
The uninformed public simply does not know better. The annual reports are obscure, take much knowledge to analyse and determination of a bulldog to fully understand. Very few financial advisors have the knowledge or ability to take a mutual funds annual report apart and fully explain it to an investor.
Too often people do not know better because their broker or financial advisors remain perfectly content to collect the very high commissions and annual fees paid by the mutual fund companies. Fees and costs eat investor returns. The mutual fund seller does very well, you, dear mutual fund investor, not so much!
I never recommend mutual funds. Rather, Exchange Traded Funds or ETFs which we will discuss next in, Change to Accelerate Investment Returns, offer an excellent low-cost alternative to mutual funds.
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These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com.
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Links to the White Top View Series, Investment Choice