Mutual funds: The good, the bad and the fine print
March 23, 2015
by Brian Wolf

This is part one in a series of columns pertaining to perhaps the most common of all investments; the mutual fund.

Although this is an investment that nearly all adults have, very few people really understand the complexities of the mutual fund industry.

I'm going to take you behind the scenes of one of the largest industries in the world (mutual funds) and show you how that industry affects investors. I would like to share some information with you to give some additional transparency about the mutual fund industry that today's financial media may not regularly comment on.

Let's take a look at the good and the bad in mutual funds, and then provide you with some ideas of what you can do to improve how you invest. My goal is that you become better informed, and hopefully, wealthier over time.

Investing well is sometimes referred to as luck and other times referred to as skill, I personally believe that it's probably a little of both. However, if you don't have the correct information, then your luck or skill factor is likely to go way down.

What is a mutual fund?

Since their inception in 1924, open-end mutual funds have been a fast growing, profitable industry. At the time of the Great Crash in 1929, 19 mutual funds existed.1 At year-end 2011, there were more than 8,600 – approximately three times the number of companies that trade on the New York Stock Exchange.2 Most of this growth has occurred over the past 20 years.3 Almost one-half of all US households (52 million) have investments in mutual funds.4

A mutual fund is a professionally managed collective investment that gathers money from many individual investors to purchase securities. Theoretically, by having access to a larger pool of money, the company is able to create a diversified basket of investments that can be accessed by many small, unrelated investors.

Investments in a mutual fund may not be limited to just stocks. Some mutual funds invest in bonds, commodities, real estate, currencies, art, precious metals, and more (or any combination of these). An investor can find a mutual fund company that will specialize in just about any asset class or mix imaginable.

Mutual-fund structure is unique in that it provides:

• easy access to lots of different securities. Instead of having to research and buy possibly hundreds of stocks and pay commissions on each, an investor can buy shares of this pooled company.

• easy access for small investors. As long as an investor has enough money to buy a minimum number of shares they can be an owner.

• easy liquidity. Shares can easily be bought and sold at the end of each business day.

• eccess to professional wisdom. Mutual funds typically hire experienced people to manage these companies, although, professional wisdom and experience is by no means a guarantee of success.

Doesn't the investor profit most from mutual funds?

Unfortunately, it's not that simple.

At the end of 2009, the more than 7,600 mutual funds of all types in the United States had combined assets of $11.1 trillion. The Investment Company Institute, a national trade association of investment companies in the US, reports that mutual fund assets were $23.6 trillion worldwide on the same date. In an industry this size, the net profits are huge; estimated at $75.7 billion annually.

In an industry this size the net profits are huge – estimated at $75.7 billion annually. 5

Every dollar of expense that your mutual fund incurs is a dollar that you don't get to keep. Mutual funds can incur many expenses, only some of which are revealed in the fund's prospectus.

A special thank you to Global Financial Private Capital for their insight on this column.6

Please check back each week for the continuation of columns on this topic of mutual funds.

If you have questions about mutual funds or would like your complimentary "stress-test" to evaluate your portfolio, please give us a call.


1 A Brief History of the Mutual Fund, Investopedia.com

2 Ibid

3 2012 Investment Company Factbook, The Investment Company Institute

4 Ibid

5 Statistical Abstract of the United States 2012, U.S. Census Bureau

6 Global Financial Private Capital

Investment advisory services offered through Gradient Advisors, LLC (Arden Hills, MN 877-885-0508), a SEC Registered Investment Advisor. Gradient Advisors, LLC and its advisors do not render tax, legal, or accounting advice. Wolf Wealth Advisors is not a registered investment advisor and is not an affiliate of Gradient Advisors, LLC

Advertise in over
250+ MN newspapers