Why mutual funds are bad investments?

Question

I know there are tons of costs when owning mutal funds, but do you know why they're considered bad investments.

Doesn't matter if you don't agree they're bad, just let me know why, if you understand it. My funds were good last year at 14%, I don't think that's bad. It's probably not the best out there.

Use layman terms, please. Thanks.

ADD: Is there a difference between mutual funds in a 401K and outside?

Anyone believe in what Robert Kiyosaki is saying? I just read his article on mutual funds, please explain his numbers.

Answer 1

People who say its bad mean they are afraid of investing their money. They just don't understand it.

Let's say you had $10,000 and you want to invest it. Would you buy stocks by yourself or have a professional money manager to do it? That is what a mutual fund is. There is a professional money manager who invests your money in various companies. Every mutual fund has a specific objective, whether is achieving high growth or have some growth while protecting the principle or little growth while generating income.

There are many mutual funds out there. Many don't do so well and some do. You should read the prospectus before investing in that mutual fund.

Answer 2

Let's take SPY, an ETF that tracks the SP 500 and a tracking mutual fund that also tracks the SP 500. Let's call this mutual fund XYZ.

SPY I think charges less than 1% a year to own SPY while XYZ charges 2%. SPY offers the dividend money. The people that run XYZ put the money back in the fund and this money gets eaten up in buy and sell fees and taxes. With SPY, you are the owner of the basket of stocks. When others sell their share of SPY, it doesn't effect you tax wise. The people that own XYZ have money taken out of their gains to pay for taxes when people sell their shares.

Some managers like to churn (rapided buying and selling to collect the buy and sell fees), which further erodes the gains of the fund unless the managers are very good and know when to buy and sell (which is not often).

In the end, SPY will probably give you a better rate of return than XYZ even though they track the same stocks.

2006 was a very good year for stocks. 14% puts you in league with the benchmark of the SP 500 minus dividends. Some mutuals lost 30% or more! The best ones were up around 34%.

Answer 3

Mutual funds spread the investment usually among the 500 top corporations. I believe they charge you for everything they do. You did good last year because the stocks in general did good as a whole. It's been said that had you done the investment yourself (also spreading the investment), you'd most probably do as well as your mutual fund manager.

They are not bad investment per se, I think whoever you were talking too is trying to convey the idea that you could do better investing your money elsewhere...like 401K which is sheltered from taxes. 401K, the one I have anyway, also uses the same approach the mutuals do, spread the investment, so in all likelyhood my 401K probably hit the 14% mark too. The difference is your mutual would be taxed but my 401K would not. Not only that, part of the money I invested to the max allowed by IRS would have a delayed tax feature. Another alternative is to use it to upgrade your home, or buy lease properties. These type of investments not only provide income but also have positive influence in your taxes.

Answer 4

Mutual funds aren't bad but facts are facts. Most don't beat the markets over long periods of time 10 years or more. And the ones that have rarely keep it up forever. That being said, I still invest in mutual funds where a manager picks stocks instead of an ordinary index fund. I also pick my own stocks. I like the riskier plays because the reward is great when things are flowing (like right now.) :)

Answer 5

In my opinion they are bad because you have no control over your funds. You hand your cash over to someone else and hope they turn a profit for you. Also, mutual funds only make money when the market is bullish. When the market is bearish, you lose a lot of money, not to mention, you can't really sell units of mutual funds because no seasoned/astute investor would want to buy them.

When you know how to invest in the stock market you actually make more money when the market is bearish than when it is bullish because fear drives people to sell off their shares and stocks at ridiculously low proces due to fear; you thus, get great bargains.

Mutual funds are also bad because they are an indirect form of saving using dollar cost averaging etc. Savings are always chewed up by inflaton. Although, your mutual fund did very well when compared to other mutual funds, the reall value of your return was 14% minus the going rate of inflation; so you actually made less return than you think.

There are ways of getting at least 30% plus return on investment in the stockmarket, if you know what you are doing and know how to use varied vehicles of investment e.g derivatives, warrants, futures, exchange traded options, index options etc. I can attest to it. However, if you don't know what you're doing in the stockmarket, then the best option would be to hand over your money to a fund manager and hope they make profits for you.

Answer 6

They aren't.