Are Mutual Funds Worth It?

A majority of people are now familiar with mutual funds. Mutual funds are managed collections of investor money that are invested in various underlying equities. They have a fund manager, who is a professional hired to operate the fund.

Mutual funds have become considerably more popular over the years. The popularization of 401(k)s and other investment vehicles have helped propel the mutual fund industry to over 12 trillion dollars. Compare this to the 1960s with 48 billion. Obviously there has been a dramatically growing interest in this area of investment.

Mutual funds can invest in pretty much any kind of security. Typically they invest in stocks, bonds and cash instruments, but there is essentially infinite variety. Their portfolios are adjusted periodically by their fund manager, to maximize returns in his or her judgment.

One particular type of mutual fund is of particular interest. This is the index fund, which is intended to simply mimic the returns of the market. In this kind of fund, the role of the fund manager is quite minimal. His or her actions are largely dictated by the mechanisms of the fund.

While an index fund may not sound like a particularly exciting investment, data seem to suggest that over time actively managed funds do not outperform the markets. While mutual funds often tout their 5 or 10 year returns, this can actually be a very small sample space. A fund manager may have a strategy that beats the market under certain conditions, but once those underlying conditions change their fund may very well underperform.

All of this suggests that mutual fund managers are typically not worth the fees they are charging. If you can get similar or superior returns over time by simply investing in an index fund, why pay the management fee for an actively managed fund. Moreover, why go through all the trouble of researching and investigating the funds.

By: Vitaly I

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Vitaly Indinko writes about investing and other personal finance issues at worthyposts.com. Learn what is the alternative to buy and hold?, and other tips for making your money work for you.