On the surface, mutual funds seem like a great idea. They are a great way to invest into a diversified portfolio with a really smart professional making all the investment decisions. These two facts are true but they do pose a couple of problems.
Active Management: Whenever you have a person or team of people actively picking the stocks that are invested in, it costs money. These fees usually come out between .5%-2% of what you invest with them. This may not sound like very much, but it really adds up after years and years of these fees. That 2% that you spent on mutual fund fees could have been used to reinvest and take advantage of compound returns.
“Well,” you might ask, “doesn’t mutual funds have higher returns because they have professionals picking the stocks? Aren’t the fees worth it?” Good question. Unfortunately, the data shows that on average 50% of mutual funds do better than the market and 50% of mutual do worse. And Statistically, the 50% of funds that beat the market last year don’t have a greater than 50% chance to beat the market this year. This means that it is 50% gamble to guess which funds will outperform.
Let’s say you got fairly lucky and invested in fund that matched the market perfectly, meaning the market grew by, let’s say, 8% and your fund grew by 8%. You’d still have to pay your mutual fund fees (ie. .5%-2%) and your return would be decreased by that amount. To summarize, if you invest in a mutual fund for a long period of time, it is very probable that your return will match the market minus all the fees.
So, what do we invest in? If you are looking for diversification, I’d suggest a low-fee index fund that mirrors the market. This way you can grow with the market without all the fees eating at your returns.
Everyone’s situation is different, and an index fund is not always right for everyone. This article is just intended to educate and not give specific investment advice.
For more info about mutual fund fees, check out this article:
https://www.investopedia.com/university/mutualfunds/mutualfunds2.asp