The Big Mutual Fund Lie

For many of our readers this is the time of year when you are thinking about making investments in mutual funds through tax shelters. However have you stopped to consider if they really are the best investment for you? Mutual funds, as you know, are pooled investments. A mutual fund invests in a wide range of stocks and or bonds, and because of that, they are diversified and less risky than investing in only a few select stocks. However there are costs – large costs associated with this type of investment. Most mutual funds have some sort of deferred sales charge, and yearly management expenses (the so called MER or management expense ratio). Most of these charges and expenses are not apparent. These fees are also taken off regardless of the performance. So if your fund makes 8.5% but the MER is 2.5% then, guess what – you only make 6%. Even worse is if the fund loses 4% the MER is still charged and now your loss is 6.5%. That really hurts!
Let’s look at some examples.
First let’s look at the example of investing $100,000 in a no-load (no back or front-end sales charge) balanced fund for 25 years. This is a good example because many people have investments in balanced mutual funds. In this case you will probably have growth of $427,000. Some might be happy with that – until they found out that if they had avoided the hidden
expenses they would have made another $327,000 for a total of $754,000 in growth. This is quite a difference! Over 25 years almost half of your profits are eaten up in fees and lost opportunities because of the fees.Next let’s look at the example of investing $100,000 in a back-end loaded balanced fund for 25 years. In this case you will probably have growth of $401,000. But the fees and lost opportunities would have eaten up almost $500,000! Again half of your potential growth is eaten up and lost forever.Obviously this is not a good situation, and if you can avoid it you should. Fortunately you can avoid it by simply investing in ETF’s and bond ETF’s or directly in strip bonds. (For more information on ETF’s please see other articles on this site.) Please also be aware that banks, insurance companies and many commission financial advisors will push mutual funds on you because they make 5% or more on the sale and they also make trailer fees – fees that are paid to them each year for several years as long as you continue to hold the investments. For more information on the cost of holding mutual funds see: http://www.investored.ca

Scrooge