Mutual Funds: Too Much Risk to Even Consider
What are Mutual Funds?
Mutual Funds are investment vehicles made up of a pool of money collected from investors for the purpose of investing in securities. These funds are operated by money managers who invest the money in an attempt to make gains for the investors and meet the goals of the fund stated in its prospectus (a document explaining the details of an investment offering for sale to the public).
Mutual funds are a staple of investment banking, mostly because financial advisors stand to make a great profit from them. Mutual funds are often sold to investors by advisors claiming they have built-in diversity. This is not true. Mutual funds usually contain (among other investments in the securities market) stocks and bonds, two investments which can actually be quite risky for the average investor, and which are not very diverse.
Risks of Mutual Funds
- Fees: Mutual Funds contain a whole host of fees your advisor may not tell you about, including management fees, load fees, redemption fees, exchange fees, account fees, purchase fees, and “12b-1” fees. These fees are usually charged yearly and can take a great deal of money out of your account, sometimes causing you to get zero or negative returns.
- You pay these fees whether or not you get a return, and even if you get a negative return.
- Mutual Funds are not insured by the FDIC or any other organization, so if the institution holding your fund goes under, you lose your money.
- Funds that have performed well in the past can easily tank in the future because of the unpredictability of the stocks and bonds they contain.
- Especially with actively managed funds, you lack any kind of control over what happens with your investment.
- Unless you read your prospectus from cover to cover, you may not even know what investments are being held in your mutual fund. Prospectuses are intentionally written in financial jargon designed to confuse investors and make it difficult to know what they are investing in.
Why are Mutual Funds Risky?
Mutual funds are risky because they are based in the securities market. As many investors learned in 2001, and again in 2008, securities can be unpredictable, crashing suddenly in response to economic factors. When investors choose a mutual fund, they do so because they want an experienced money manager making decisions that will affect their investments. What many of these investors found was that the managers of mutual funds are not always looking out for the best interests of their clients. Due to the lack of a fiduciary responsibility in the financial industry, money managers and advisors are not legally obligated to act in a way that would benefit investors. As a result of this fact, advisors often sold the mutual funds that would make the most money for them, not their clients.
When you take into account the fact that investors pay fees, whether or not they make money on a mutual fund, you can see why they are not a safe investment. If your mutual fund has a bad year, you will still be responsible for paying your fund manager for his services. Would you pay someone who did a bad job managing your money? In fact, many investors did exactly that in 2008, and continue to do so today.
To get the truth on the risks of mutual funds, attend one of our Crash Proof Educational Events.
The information contained in this page is strictly for educational purposes and is not intended to provide specific financial advice. First Senior Financial Group does not recommend or sell securities to anyone at any time.