Top 5 Reasons Why Mutual Funds Fail

failing-mutual-funds.jpg

Fees

1. Mutual funds charge a fee, the Management Expense Ratio (MER), to cover their expenses. An MER virtually guarantees that mutual funds will lag the stock market performance. In a previous post I discussed the high cost of mutual fund fees.

Selling at the wrong time

2. A mutual fund will drop in price if a large number of mutual fund holders decide to sell their funds in a short amount of time. This is especially worse during a market downturn, at which time everyone runs to their mutual fund company to redeem their money. This forces the fund manager to sell (in order to refund people their money) even when some stock holdings might still be undervalued and worth holding on to, this is a disadvantage to current mutual fund holders who do not wish to sell.

Taxes

3. You pay taxes on any capital gains incurred by the mutual fund annually; even if you don't withdraw any money that year.

Biased Advice

4. Can you really get unbiased advice from mutual fund sales people who work for and earn commissions from their respective mutual fund companies?

Everyone gets paid except you

5. “Most mutual fund companies are paid based on how much money they manage rather than on how well they manage it. The brokerage firms control the money. In order to have access to the trillions of dollars that the brokerages control, mutual funds buy “aggressive” investments, pay some of the brokerages’ expenses, and even offer kickbacks every three months! They do this-and more. Of course, it’s no sweat off the mutual fund company’s back because they’re all doing this with your money! So long as your brokers and advisors can convince you to “stay in it for the long term” and scare you into the “safety” of diversification through their mutual funds, everyone will keep getting paid. Except you.”*

Visit Tom Connolly's website for 19 more reasons why mutual funds fail.

Did you enjoy reading this article? If so, I encourage you to sign up for my newsletter and have these articles delivered via e-mail once a month…and it’s free!

*”F Wall Street”  by Joe Ponzio, page 7

7 comments

Dividend Mantra May 2, 2011 02:17pm

I couldn't agree more. Mutual funds are a horrible investment for all but the most passive investor..and even if you're that passive you are better off with some type of index fund.

I say stay away from these things...unless you like writing checks to people that are simply good at cashing checks.

Read more
Read less
Kanwal Sarai May 2, 2011 03:57pm

@Dividend Mantra Thanks for your comments! I've found it is actually more profitable to own shares in companies that sell mutual funds rather than buy their mutual funds.

Read more
Read less
Dividend Mantra May 3, 2011 12:00pm

I agree!

Read more
Read less
How to Be a Successful Investor | Simply Investing Mar 8, 2014 05:25am
[…] 5 Reasons Why Mutual Funds Fail […]
Read more
Read less
Mutual Funds vs Simply Investing | Simply Investing Mar 8, 2014 07:49am
[…] funds make poor investments, and I’ve written about them before here and here. Stop handing over your money to mutual fund sales people. Save your hard-earned cash, and invest […]
Read more
Read less
Helping You Earn More in 2015 | Simply Investing Jan 24, 2015 09:21am
[…] Do You Know When to Buy Stocks? How I saved 4672% in Fees, and Continue to Make Over 14% Each Year on a Single Stock What is the P/E Ratio, Could it Save You Thousands? Top 5 Reasons Why Mutual Funds Fail […]
Read more
Read less
What’s Your Biggest Fear in Investing? | Simply Investing Jul 18, 2015 06:09am
[…] hand over their money to mutual fund sales people to invest for […]
Read more
Read less