The downside risk
Expensive
The average equity mutual fund has a management expense ratio of 1.4%
in the US and 2.1% in Canada. This is a reoccurring annual fee
charged to your portfolio regardless of how well the fund performs.
These fees can cost you dearly in the long run. In contrast, the
average Exchange Traded Fund MER is only 0.17% and has a 90% chance of
beating any mutual fund in that industry.
Poor Performance
Only 12% of all mutual funds consistently outperform their market
benchmarks. Improve your odds of beating 88% of all mutual funds
by simply buying the ETF equivalent market. You will achieve
market returns with a lower overall MER.
No capital preservation
Most mutual funds have investment mandates to have the bulk of their
funds fully invested. This means that even in severe down
markets the mutual fund managers cannot sell their holdings and
retreat to the safety of cash. This is why their is so much
advertising published from the mutual fund industry about the benefits
of buy and hold.
Additional Sales Fees
Trailer fees, front loaded fees, deferred sales charges and other
incentive fees charged to compensate Investment Advisors add to the
overall cost of holding mutual funds. These fees can also make
it very difficult to liquidate funds or change fund families without
incurring significant additional costs.
Mutual funds focus on relative returns only
It is mind-boggling that the mutual fund industry is happy to achieve
a -24% yearly return as long as the overall index returns is lower!
What happened to capital preservation and absolute return levels?
I would much rather have a zero percent return than losing 24% of a
portfolio value. That 24% drop will require a 31.57% return the
following year just to break even!
Conflicts of Interest
The mutual fund industry and its sales people have financial
incentives that may not align with your best interests.
Funds that pay high trailer fees and commissions may be recommended
even though they are not the best fit for your investment objectives.
Mutual fund sales advisors regularly recommend a select stable of
funds that pay high commissions, even though better funds with lower
MER fees and stronger performance track records exist.
Be cautious and aware that "you are their lunch money."
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