Many investors harbor the mistaken notion that there is no charge for investing in mutual funds. But this is wrong. Funds earn over $50 billion annually as fees from investors. The first way you lose money in a mutual fund is by paying the high fees levied. These fees can drastically lower your returns over a period of time.
As these fees are automatically subtracted from a fund’s returns they are hidden from you, since there is no invoice or trouble of writing a check. If you invest $10,000.00 in a mutual fund whose expense ratio is 2%, a sales load is 3%, and annual returns are 7.5% for 20 years, your investment would nearly treble to $27,508.00.
But the drawback is you would have to pay $14,970 as fees and lost earnings for 20 years. So bypassing the system and purchasing stocks directly will help you save money and earn better returns.
Besides there is a lot of hype surrounding the selling and management of these funds. These funds also indulge in other malpractices like short term trading, and hiding important information from the public. These are the strategies that any successful investor must avoid. Also the industry works by throwing the investors off the track by elaborating on past performance, which must always be ignored. Many mutual funds swindle the investors by charging excess fees as investors don’t realize that these high costs erode their profit. Mutual funds don’t want to educate the investors as their gullibility makes them an easy prey to the industry’s wiles.
Do not trust the mutual funds except the indexed ones. Indexing means the mutual fund just buys and sells stocks in their portfolio with the help of a computer to ape the structure of a major stock market index like the S&P 500. This does away with a fund manager extracting high fees.