Criticism of mutual funds
While mutual
fund investing has exploded over the past 50 years to become one of the most
popular forms of investing anywhere, there are still possible pitfalls that you
can fall into if you’re not careful. Investing is still a risky business, even
if everyone is doing it. Here are some tips to help you through any problems
you might have.
One common
criticism of mutual fund investing is that they don’t have a high enough return
on their investment and that index funds, which aren’t as popular have
historically returned a higher investment than the much more popular actively
managed mutual funds.
A second common
problem that some have with mutual fund investing is the use of load funds. You
have probably seen the phrase “no-load mutual fund” in the newspaper or on
television. The reason the no-load type of fund is preferred is because load
funds come loaded with fees. These fees can run anywhere between half a
percent, all the way up to 8.5 percent of however much you chose to invest.
It’s thought that these fees are a clear conflict of interest as they clearly
benefit the people making the sale and hurt the person making the investment.
Load mutual funds are also thought to make your broker recommend funds that
will maximize his fee, and not your investment portfolio.
Some investors
also point to a perceived conflict of interest in regards to the size of the
mutual fund. Most companies that manage the mutual fund charge a fee of between
half a percent up to two and a half percent of the total amount of the funds
assets. It’s thought that this fee could cause a fund to spend more on
advertising than is actually needed so that they can get more people to invest
in the fund and maximize their fee as much as possible.
The mutual fund
market isn’t immune to scandals, either. In 2003, a scandal involving the
practice of unethical and dishonest trading practices. Many funds were found to
have participated in late trading and market trimming, both of which are
illegal practices. You obviously don’t want to invest in a mutual fund that is
engaged in illegal activities.
Mutual fund
investing is gaining in popularity on an almost weekly basis, and a few bad
eggs in the business won’t ruin it for everyone. However, it is always good
advice to enter into any kind of investing with your eyes open, and if you feel
your mutual fund is behaving improperly, there are authorities you can report
them to.