Are Mutual Funds Worth Your While? Part Two

In part one of this series, I let you know some of the pros and cons of mutual funds. I wrote that there are many expenses that come with investing in a mutual fund, including the high price of management fees and brokerage fees that come with frequent trading. But, the fund manager is bound by a responsibility to find the best deals on commission for you that she or he can. The expertise of a fund manager can be quite helpful for beginners when they start to invest, too.

Also, a number of mutual funds offer more than one class of shares. The way it works is like this: every class invests in the same pool of securities and the investment objectives and policies are the same. But, every class has different shareholder services and distribution arrangements for different fees and expenses. So, if you pay more money for a higher class of share, you can expect different services, and better performance out of the mutual fund. This multi-class structure gives investors the capacity to pick their own fee that fits their investment goals best.

Despite the fact that all of these aspects of mutual funds are pros, critics return to the high cost of mutual funds as a major con. They are also quick to point out the lack of efficiency of mutual funds when compared to a simple index fund. An index fund will invest in companies that are part of major stock or bond indexes and thus tries to profit from simply riding the market, while funds that are run by a manager attempt to outperform a relevant index through advanced stock picking techniques.

The assets of an index fund are geared to closely match the performance of a particular published index that shows positive trends. Because there will be little changes associated with a stock index, an index fund manager performs less trades than an active fund manager. Due to this fact, the management fee will be much less, and because there are less trades, there will be lower trading expenses. In fact, mutual funds have fees that are usually four times as much as those charged by index funds.

Additionally, evidence shows that mutual funds generally do not, in fact beat the market, and actually under-perform other portfolios with similar characteristics. One study showed that almost 1500 United States mutual funds underperformed the market in about half of the years between 1962 and 1992. What is more, analysis shows that funds that did well in the past aren’t able to beat the market again in the future. And perhaps what is worst is that even if your manager proves to be a dud, and your mutual fund does not do well, you will be stuck with a premium in fees – and often a large tax bill. Ultimately, it is a decision you should make after long thought and weighing all of the pros and cons, and not one that you should take lightly if your money is important to you.

Mallory Megan works for Rapid Recovery Solution and writes articles on national collection agencies.

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