Mutual Funds

The Mutual Fund Phenomenon

There are over 14,000 mutual funds today.  There are A shares, B shares, C shares, T shares, an almost limitless number of ways that funds are priced and can be purchased. 

Exacerbating the pricing dynamics are the various ways of computing breakpoints.  The more shares you buy, the less expensive the initial purchase—on some. 

And what exactly are these mutual funds investing in?  Does a fund that refers to itself as a small cap fund really limit its holdings to just small company stocks?  Or does the manager have the authority to buy stocks from other asset classes, such as mid-cap or large cap?  The answer is that most likely he does.  So why call it a small cap fund if it’s not invested only in small company stocks?  What if what you really want is a small cap fund?

In addition, how do you know that your fund isn’t purchasing stock in a company that is profiting in abortion clinics?  How do you know that your daughter’s college education fund, which you have invested in mutual funds, isn’t holding stocks of companies that make their profit from the pornography industry? 

• Of the 14,000 funds available, can you tell me why you own the one(s) that are in your portfolio? 
• Can you tell me how your fund(s) compare to its peers? 
• Can you tell me how long you will own it, how much of your portfolio it should comprise, and why? 
• Finally, how happy are you when the fund’s net asset value loses money, but you still have to pay tax on interest, dividends, and capital gains? 

Talk about adding insult on top of injury!

What’s the solution to this Rubic’s Cube? Stay away from mutual funds altogether? Absolutely not. Mutual funds can be an important part of a balanced investment portfolio.

The solution involves following a few simple steps:

1. For balances of $25,000 or more, utilize a professional money management firm that will buy true no-load funds and Exchange Traded Funds selected from a platform that offers hundreds of thousands of options. Choose a firm and an investment strategy that meets your risk and performance objectives.

2. For balances under $25,000, utilize one or two funds that have strong track records, and screen out those companies that do not meet your personal values.

3. Where possible, try to utilize IRA, Section 529, UTMA, or other tax-advantaged plans that offer some tax relief.

But beware.  The popularity of mutual funds is such that many fund companies and financial advisors act as if mutual funds are the Holy Grail.  They’ll suggest mutual funds for this, mutual funds for that, and mutual funds in between.  Mutual funds are nothing more than one important part of a balanced investment diet.  Overload on them and you’ll be mutual-fund obese.  Ignore them altogether and you might get mutual-fund rickets.