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Opinion: MUTUAL FUNDS ARE BAD
When I first learned about mutual funds, I really liked how they work. Diversified to minimize risk, tailored to meet your needs, and almost no need to check up on it. However, the costs involved is not very promising. Since the NAV is calculated Typical corporate equity funds, categorized as medium risk, may have gains to average to 3% in 3 years, roughly 5% in 5 years, and 10% in 10 years equating to 1% average annually. Some have higher numbers and some have negatives. In other words, it sucks in terms of gains (since Canadian inflation is around 1.5%) and isn’t too dependable for mid to long-term investments especially for retirees unless you go higher in risk. Quite possibly the best part is not having to worry every day, week, or month compared to active traders so a normal person will not need to spend hours to research and checkup everyday. Most of the mutual funds do have positive gains in the long run, but the number can vary considerably.
What are mutual funds and how do they compare with segregated funds?
Mutual funds are an investment vehicle (def: a product of sorts that is intended to give some form of return back to the investor). The money for the mutual fund comes from all who invest in it and it is invested in a portfolio (def: a collection of investments) that is designed to carry a certain level of risk and degree of asset allocation (def: percentage of stocks, bonds, cash, etc. the portfolio invests in).
A few analogical example to describe mutual funds is the lake or a tree. Money is similar to water where the source comes from a variety of places and would then be separated off into creeks at the fork. Trees absorb their water and nutrients from the ground through the roots and carries it to the trunk where it is managed and then reallocated to each branch.
Segregated funds are normally sold by insurance companies and function almost the same as mutual funds, which are usually sold by banks. Segregated funds differ however in the way
Please look forward to comparing mutual funds, seg funds, etfs
Who manages your mutual funds and how much trust can you put in it?
Each mutual fund is managed by a portfolio manager also known as money managers or investment managers and who then employs many other people to conduct research, selection, and monitoring on potential investments. The portfolio manager then chooses how the funds are to be managed in tandem with the stated risk and allocation of the portfolio itself. The portfolio from there on continues the strategy of buying and selling to meet the intended goal of making positive returns. Each sale of mutual funds has a sales charge and it goes to the individual who sold it, usually a financial advisor (def: a person in this job recommends where to put your money, how much, and when to take it out to meet your goals).
What are the costs involved?
Sales charges come in the form of front-end load (def: paid in the beginning therefore decreasing of your starting portion of investing) and back-end load (def: paid at the time of sale, therefore decreasing the the amount received). The sales charge depending on the company and institution is about 4-6% is actually a bundled cost that pays the commission to the financial advisor as well as the administrative paperwork involved in the sale. Financial advisors usually only take about 70-80% of the remaining sales charge as their commission. The controversy here is that financial advisors are paid on commission primarily, making their goal biased to sell more and make the sale as opposed to their fiduciary duty to serve in the customer’s goals and intentions.
Each portfolio for mutual funds carries a cost known as the Management Expense Ratio or MER (def: the cost associated with running the portfolio, such as administrative costs) and is paid out regardless of whether the fund performed well or not. Management fee is the cost paid directly to the portfolio manager. Administrative costs goes towards taxes, legal, audit, bookkeeping, compliance, etc. Ex. If MER was 2.29%, that would be the overall cost to function. If management fee was was 1.67%, that would be the cost to the portfolio manager. The remaining 0.62% would be the administrative costs. MER is expressed as a percentage annually, but the money is charged and paid daily and before recalculating the Net Asset Value or NAV (def: the amount of assets a portfolio contains in the form of stocks, bonds, cash, etc minus the liabilities incurred, such as transaction fees and management fees, divided by the number of shares a mutual fund might have at the beginning, mid, and end of the trading day.
Miscellaneous costs include transferring from institution (I highly recommend that you do not transfer institutions since the costs of buying, selling, transferring, and buying again creates a significant impact on your capital), changes to investment, and changes to beneficiary. All these costs will and should appear in the prospectus you received from buying the investment including all information associated with it.
Please look forward to Let’s Learn-Banking correctly to minimize costs
What are the risks and returns involved?
What are the strengths and weaknesses of investing in mutual funds?
How are mutual funds regulated?