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Avoid Mutual Funds

When looking for a safe and profitable investment vehicle is it wise to look for or avoid mutual funds? Mutual funds are professionally managed pools of money from many investors. Mutual funds are marketed as investment products to the investing public. These vehicles are most often open ended in that investors can buy into the fund or remove their money. However, the price of entry and exit is commonly much more than for buying and selling stocks or other investments. This is often a good reason to avoid mutual funds. Mutual fund performance is another issue and a common reason to avoid mutual funds. These investment vehicles are historically considered to be conservative in that one does not expect to lose money and is in return willing to accept a more moderate return on invested capital. Unfortunately, many avoid mutual funds because they can indeed lose money. On top of this the fund commonly charges a hefty management fee even in years when they lose money. Mutual funds are registered with the Security and Exchange Commission in the USA. They must be overseen by a board of directors and must be managed by a registered investment adviser. These funds are not taxed on profits although gains realized by investors are taxed. The most common use of mutual funds is for individual retirement planning. The three types of funds are open ended, unit investment trust, and closed-end. An argument for mutual funds is that a professional does the fundamental analysis and picks the best stocks.

What Do Mutual Funds Invest In?

Mutual funds offer their investors four basic options:

  • Money market funds
  • Bond or fixed income funds
  • Stock or equity funds
  • Hybrid funds

An additional feature of a mutual fund is whether it is an index fund or is actively managed. The latter approach is meant to let the fund compete with Exchange Traded Funds which allow investors to enter and leave the market more efficiently and cheaply and have become a good reason to avoid mutual funds. Of the two major drawbacks to investing in mutual funds, one is the high cost of a fund’s expenses, which are born by the investors. The other is that in too many years a given mutual fund which is run by a professional investor may not do as well as the market in general. When picking sound investments it is sometimes more profitable to avoid mutual funds.

Alternatives to Mutual Funds

In a general sense there are many alternatives to putting your money in a mutual fund. However, a fair comparison requires that the person pick an investment vehicle with the same goals as a mutual fund. Mutual funds invest in a lot of stocks, bonds, or other funds. Thus they offer a diverse range of investments to the investor. People looking forward to retirement commonly want a conservative investment with a lot of diversity. They want to make more money on their investments than with a CD at the bank and they do not want to lose any money. A diversified investment portfolio is a key to such an approach. An investment vehicle that offers portfolio diversification could be an Exchange Traded Fund that tracks the S&P 500 or other index that tracks the market or a broad market sector. Unlike with a mutual fund, investing in an ETF carries the same costs as investing in individuals stocks. There is no carrying cost or management fee. There is no penalty for withdrawing funds. The rationale for a broad based ETF is that in many years the S&P 500 and other indexes beat the performance of many mutual funds. Rather than seeking to diversify your investment portfolio, a simpler approach might well be to invest in and ETF and avoid mutual funds.

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