Top 5 Things Mutual Fund Companies Don’t Really Want You to Know Comments16 Comments


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1. The majority of mutual funds underperform the stock market

Historically the majority of mutual funds continue to underperform the stock market; this is partly due to their cost overhead, and the strategies employed by their fund managers.

“Over time, because of their costs, approximately 80% of mutual funds will underperform the stock market’s returns.”*

“Over the past five years, fully 91 percent of all mutual funds have underperformed the market’s average return.”**

2. Good fund managers are lured away by other mutual fund companies

There are only a handful of great fund managers; the problem is all of the mutual fund companies wish they had those great managers working for them. Mutual fund companies hire away the best managers from competing companies in order to raise their own performance and gain customers. But when a great fund manager leaves, the performance of their mutual fund usually suffers resulting in losses for you.

It is difficult to know when your mutual fund manager has been replaced and where he or she is now working. As a mutual fund investor it’ll be nearly impossible for you to follow the fund manager with your money without incurring costs along the way.

3. When a lot of people start withdrawing money from their mutual funds, all fund owners suffer

When markets are down, people panic and start calling their mutual fund company to redeem their mutual funds for cash. At this point the fund manager has no choice but to sell the stocks/bonds in order to return the cash to the mutual fund owners. Even if the fund manager believes that the stocks should not be sold (because for example the stocks are not yet overvalued, or the stock price may rise in the next 6-12 months) he or she has to sell the stocks when customers start asking for their money back.

When a stock is sold prematurely the losses are solidified and the entire fund suffers, even the customers who decided not to redeem their mutual funds will see their portfolios drop in value.

4. Even if you don’t sell your mutual funds, you’ll still pay taxes any capital gains

Outside of your retirement accounts (RRSP, 401k) you generally have to pay taxes on any interest, capital gains, or dividends earned. When the mutual fund incurs a gain, the gain is distributed among the mutual fund owners. As a mutual fund holder you will have to pay taxes on any of those gains even if you did not redeem any mutual funds that year.

With stocks, you only pay taxes (outside of your retirement trading account) on the capital gains when you sell the stock.

5. All mutual funds have fees, including index funds

All mutual funds have a fee called the Management Expense Ratio (MER). The MER helps to pay for the mutual fund employees, expenses, office space, administration, and marketing budgets.
Speaking in Toronto on December 4, 2000, John C. Bogle, founder of the Vanguard Group, presented, in great detail, data to prove that “mutual fund investing is an expensive home to long-term investors.” $1,000 invested 50 years ago in the S&P 500 would have grown to $514,000. However, with fees (MER) of 2.2%, financial intermediaries would have taken $321,000 of the sum leaving only $193,000 for the investor. Bogle used the word “shocking” to describe this loss of 63% of the market’s cumulative return to the intermediaries.

Bonus #6: What They Really Don’t Want You to Know!: The Solution

The solution is simple, avoid paying any fees, and learn how to invest in quality companies on your own. Manage your own portfolio instead of losing 63% of your money over your lifetime to the mutual fund companies. First transfer your RRSPs to a brokerage and then take control of your investing decisions. Investing on your own can be simple, quick, less risky, and more rewarding!

best online brokers Click here for a comparison of the best online brokers.

Author Bio: Kanwal Sarai, is the founder of Simply Investing, and on a quest to bring financial freedom to all. He created the Simply Investing Online Course on the belief that the world can be a better place if people didn’t have to worry or stress out about money. Simply Investing’s goal is to make investing easy, save you time, and help you safely earn more.

** Page 260, “You Have More Than You Think”, David Gardner

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By : Adam | 22 Apr 2013
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16 thoughts on “Top 5 Things Mutual Fund Companies Don’t Really Want You to Know

  1. Apollo

    I hate to tell you, but a good mutual fund manager is an oxymoron. There is no such thing as a good mutual fund manager, that is why they are the primary tool for dumb money investors.

  2. hungry hungry artist (@blerghhh)

    I think you’re being too generous!

    Mutual Funds are “products” sold to customers. The company that sold you the fund makes money regardless if you win or lose.

    The bulk of these products are designed to make jobs for the company the sells the funds.

    1. Kanwal Sarai @ Simply Investing

      Thanks for your comments, Apollo and hungry artist!

      Here’s a few lines from the book “F Wall Street” (Foreward by Michael Trekas, page xi) that you might also enjoy: “When I first started my career in the financial services industry as an investment adviser, I began to realize that I was being trained not to give sound financial advice but rather to push the hot, new investment product of the month. Every few weeks a wholesaler would stop by and take a group of us out for a very nice dinner and pitch his or her investments. It almost felt like our investment decisions were not made by the quality of the investment, but rather by who would give us advisers the best perks.”

  3. John S @ Frugal Rules

    Good post. I have heard that mutual funds in Canada are much worse than they are here in the States. That said, I would not use a broad sweeping brush on all mutual funds. There are some good ones out there that are low in fees, you just have to know what to be looking for and make a wise decision. The problem is that so many retail investors make terrible decisions in managing their own portfolios when they just pick stocks that a good mutual fund can help them…as long as they don’t simply set it & forget it.

    1. Kanwal Sarai @ Simply Investing

      A Morningstar report from 2011 showed how bad mutual fund fees in Canada are when compared to other nations.

      “The report found the median asset-weighted expense ratio to be 1.31% for fixed-income funds, 2.31% for equity funds and 0.80% for money market funds. These fees were the highest among the 22 countries in the survey for equity funds, third highest for fixed-income funds and tied for highest for money market funds. Morningstar found the fees so bad that they ranked Canada an F, a grade that none of the other 21 countries received in any of the four categories — regulation & taxation, disclosure, fees & expenses and sales & media — in the survey.”

  4. AverageJoe

    I think two of the comments above are so bad, they’re comical (John, not yours). Mutual funds live on the “hot manager.” Fortunately (or unfortunately, if you prefer), you know who that manager is and can follow his/her progress.

    That said, mutual funds are dying. I’m not sure when, but the ETF, which seems better in nearly every aspect, is going to win this battle. Good article.

    1. John S @ Frugal Rules

      Shoot, I was going for comical. ;) Joe’s right on, as usual, you can try and follow the manager if he/she is making the decisions you would agree with. I also agree that ETFs are winning the battle these days and there does not appear to be any let up anytime soon.

  5. Grayson @ Debt Roundup

    Interesting article. I don’t deal with much in mutual funds, but I do have quite a few ETF’s, so I think I will be ok. These products are sold because there are many people that don’t have the appropriate time to dedicate to invest individually in stock.

  6. Kim@Eyesonthedollar

    I think if it were up to investors to pick their own stock all the time, most would be too overwhelmed to ever get started. I think if you look for low cost, no load funds, it’s not always a bad thing. I do think ETF’s are a good way to go, even if there is a bit of a fee.

    1. Kanwal Sarai @ Simply Investing

      I agree Kim, investing in individual stocks isn’t for everyone. For those people low cost no load index funds or ETF’s are the way to go. However in my experience after people have had time (years) to manage their own investments in index or ETFs they eventually gain the confidence to start investing in quality dividend paying stocks. But it does take time, so I recommend to take your time, and start with a small investment first.

      I know it can seem overwhelming, but as soon as you learn the basics the fear and stress will go away.

  7. Edward Antrobus

    I’m still sticking with mutual funds in my IRA. The added cost is well worth it to me to not have to worry about 1)learning more about investing and 2)spending more time watching investments. I have made a total of 5 trades in the last 2 years. And that is the way I like it.

  8. Mike@WeOnlyDoThisOnce

    Great to see this post–completely agreed. I wonder what options you would give to people who are moving away from mutuals but might not have the time to spend on learning how to invest on their own.

    1. Kanwal Sarai @ Simply Investing

      Hi Mike,

      Thanks for taking the time to leave a comment.

      There is a common misconception out there, most people believe that it takes an enormous amount to time to learn how to invest. In my experience this isn’t true at all, I developed my online investing course, which only takes about 2.5 hours to complete and it gives you everything you need to start investing on your own.

      It took me a lot of time to learn on my own, because at the beginning I made lots of mistakes and did not have the right resources to learn from. I’ve taken all my experience and put it into my course so that others won’t make the same mistakes I did.

      Another misconception is that most people believe it takes hours and hours of research each month in order to manage your own portfolio of stocks. People incorrectly believe that “more time spent” = “higher returns”. Again this isn’t true, in my course I teach people how to cut thru the crap and noise and invest intelligently in about 15-25 mins. Remember that time is only spent when you have money to invest, normally you will not be buying stocks every week or every month.

      So if you don’t have the 2.5 hours to spend initially to learn how to invest, and you don’t have the 15-25 mins to spend when buying stocks, then I would recommend low cost no load index funds or ETF’s. But I would argue you will probably end up spending the same amount of time trying to research which one of the thousands of index funds and ETFs you should buy. Then you give up control of your investments to the financial companies, and end up paying fees for life (they might be low fees, but they still are fees). Your time would be better spent to make that one-time investment in how to invest intelligently, then you can use that knowledge for life and become financially successful.

  9. Chris Holdheide (@StumbleForward)

    I agree the fees suck when it comes to most mutual funds as someone who use to sell them I’ve never found the perfect fund. Some funds would have higher sales charges with lower annual fees, while other funds would have lower sales charge and higher annual fees.

    Then you have funds such as Vanguard which have no sales charges and very little in the way of annual fees but the returns are typically very low.

    In the end I like the idea of controlling my own investments but I’m not sure I’d have the time to manage something that big.


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