The Truth About Mutual Funds

The convenient thing about mutual funds is not having to pick securities yourself or adjust your investment mix to diversify your portfolio. But are you paying too much for the privilege?

Mutual funds are increasing in popularity as the larger financial services companies offer products that automatically shift from aggressive to more conservative strategies when investors get closer to retirement. This added convenience seems to save time and confusion that is worth the advisory fees.

Mutual Fund Reality vs. Hype. The truth about mutual funds is that studies reveal how 90% of all mutual funds underperform the stock market.

Mutual funds, however, will tell a different story.

Once a fund beats the market on a short-term basis, they tend to create ad campaigns around their good fortune as if this fortune were here to stay. The truth, however, is that mutual fund advisors simply can't harness their good fortune for later use or predict how long it will last.

You Pay for the Advertising. What you may not know is that you pay for those sleek "we beat the market" advertising billboards and television commercials the funds use to attract new customers.

These are so-called "12b-1 fees," named after the Securities and Exchange Commission rule that permits advisors to charge advertising costs back to mutual fund customers.

You can pay up to 0.75% of your invested assets annually in 12b-1 fees, which is in addition to the sales load (up to 8.5%) and other fees and expenses you are required to pay the fund advisor for the privilege of investing in a mutual fund.

If you are concerned about the fees you are paying for your mutual fund investments, or if you are considering investing in mutual funds in the future, you can use FINRA's free Mutual Fund Expense Analyzer to see what you are truly paying in fees and compare costs among funds. Without a tool like this, you may not be seeing the big picture.

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