Mutual Funds – Everything But Mutual
“Did you know that mutual fund sellers have their own saying? It goes something like, “Two out of three ain’t bad.” To explain, the two are the mutual fund seller and the manager, who always profit. The person at loss is the mutual fund purchaser”
By Alex Vo, Contributing Blogger
From Vo Industries
Mutual funds are the greatest crime perpetrated to mankind. Theoretically, they should like great investments. It came with benefits such as diversification, high liquidity, small up-front investments, and professionals investing it in the stocks they believe will do well in the future. Mutual funds are a way where less wealthy people can get into the action of the stock market without having to read the newspaper on a daily basis and have a large sum of money. Statistics also showed that there has been a significant increase in investments in mutual funds in Canada and the United States. “If other people are doing it, I should too,” may be your thoughts.
Many people know or believe that investing in mutual funds is much more beneficial than leaving it in a savings account. That’s where the knowledge of it ends while they pretend to understand what the mutual fund salesperson is saying to them.
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.
Firstly, the acquisition costs, also called the load, are the commissions paid to the mutual fund brokers. This may either be up front (front-load) or when the shares are sold (back-load). For front-loads, the fee is paid at the time of the purchase. This commission rate may be as high as 8%, but it is usually negotiable. As for back-loads, the fee is determined when you redeem your “unit” purchased from the mutual fund agency. The earlier you redeem your unit prior to maturity, the more commission you will have to pay. Already, you can see a counter for one of the benefits; high liquidity. Although they may be liquidated easily, you will have to pay for the fees incurred and thus cutting into your potential yield. There are mutual funds which can be purchased with a “no-load option”, but over the long term it can decrease your returns due to additional management costs which are covered next.
Management costs—all mutual funds charge them, but a lot of people are unaware of them. These costs cover the wages and bonuses of the fund managers. These fees are already deducted from their quoted expected rate of return and hence why some people do not know about them. If you bought units in a mutual fund with total assets of $4 billion (which is likely, as RBC Asset Management Inc., the largest mutual fund company in Canada, has assets of over $44.1 billion) that charged a management fee of 2%, the fee for that fund would be $80 annually. This amount is paid whether the fund does well or not. In these times of economic instability, you may be postponing your summer vacations this year. However, these people will not, hence why it is another reason of why mutual funds are a crime.
Last but definitely not least, there are trailer costs that are incurred in the investment of mutual funds. Trailer costs are annual “service commission” fees paid by the mutual fund company to your sales representative.