Let’s start off what what mutual funds actually are. Mutual funds are collective investment vehicles that pool the money of thousands of investors. These amounts are managed in a professional manner by purchasing securities with the intention of creating profits both for the investors and the mutual funds. In reality, the term, ‘mutual fund’ has not been legally defined.
However, all the collective investment vehicles that follow certain regulations and sell specific fund schemes to the general public are normally accepted as mutual funds. They are also termed as ‘investment companies’ and ‘registered investment companies’.
Most of the mutual fund schemes are ‘open-ended’ schemes, which are most popular. In such open-ended fund schemes, the investors are able to buy shares for their fund schemes or sell them from the fund any time, according to their investment decisions.
This is not possible in ‘close-ended’ mutual fund schemes. Another type of fund scheme that many mutual funds offer is unit investment trust. Hedge funds are completely different from mutual funds and they are a separate category.
Regulations for Mutual Funds
All mutual funds in the United States are required to register themselves with the Securities and Exchange Commission (SEC) of the U.S. They must comply with the stipulations of the SEC Act of 1934, along with the regulations of the Revenue Act of 1936 and Investment Company Act of 1940.
A board of directors or a board of trustees oversees the funds based on their type of formation as corporations or trusts. The fund manager should be a registered adviser on investment.
Taxes on the incomes and profits are not applicable to mutual funds, but to the investors who’s money has been pooled in compliance with certain stipulations of the Internal Revenue Code (IRC) of the U.S.
Types of Mutual Funds
Out of the three types of mutual fund schemes, the open-ended schemes are the most popular, since it allows investors to purchase and sell interest in the mutual fund on all business days.
This provides flexibility to the investors in keeping their investment portfolio up to date, according to their individual preferences and decisions about market movements.
Another type of fund, known as exchange-traded funds (ETFs) are available as either open-ended schemes or unit investment trusts. ETFs trade directly on the exchange. ETFs are slowly gaining more in popularity.
Apart from their varying structures they can be broken dow ninto four classification types. They are equity or stock funds, bond or fixed income funds, money market funds, and hybrid funds. Financial experts also categorize mutual funds as actively managed and passively managed.
Dismal Performance of Mutual Funds and Hefty Fees
Mutual funds appear to offer several advantages such as daily liquidity, higher level of diversification, professional management of investments, ease of comparison of different schemes, participating with smaller amounts, and other services that offer convenience to investors.
However, the major disadvantages include, the fees charged by mutual funds in various forms, uncertainty in predictable income, and lack of opportunity to customize.
The most serious issues that have become the major concern of the investors are the large fees that they are forced to shell out to meet the expenses of mutual fund schemes and the overall dismal performance of most of the mutual funds over the past several decades.
Only a handful of mutual funds have been able to beat their individual market indices with higher net asset values (NAVs), while all the rest of them are trading below the indices with lower NAVs.
This signifies substantial loss to the investors, when the actual lower returns on investments combine with hefty fees, such as distribution charges including the 12b-1 fee, management fee, shareholder transaction fees, securities transaction fees, and other fund expenses.
This invariably leaves investors poorer than when they started their investments in mutual funds. Since most of these fees are hidden, the investors have no way of reducing or avoiding such fees. As such, even if the net asset value of the mutual fund schemes are actually above the market index, these fees take away all the possible profits and leave the investors with a net loss ultimately.
Whichever way you look at it, mutual funds are among one of the most terrible investment choices.
Select Your Own Individual Investment Strategy
Even though mutual funds have been flouted as the savior for small and medium investors, they have proved to be a myth and the failures are glaring.
It is time you took control of your investments and use an experienced investment consultant or adviser that could provide you with an investment system that offers real returns. This approach offers a win-win situation that no mutual fund can offer.