My View on Mutual Funds Page 2 Part 2: What Mutual Funds Are By Mo2

Costs
More costs? That's right, MER isn't the only cost you have to deal with for mutual funds. Mutual funds usually have one of: front-end load, back-end load, or no-load fees.

Front-End Load Fees
This type of fee is deducted before you start investing in the mutual fund. Therefore if the front-end load fee is 4% then when you invest $3,000, $120 is deducted immediately leaving you with $2,880 invested. Just remember when you lose 4% that doesn't mean you need 4% to regain the $120, you actually need more (around 4.17% to be exact).

Back-End Load Fees
Back-End load fees are charged when you exit the fund. Fund managers want to lock in your money and they don't enjoy people moving in and out of their funds. Therefore, this type of fee gives you, the investor, an incentive to stay with the fund because the fee will decrease the longer you stay in the fund

For example, if you exit a fund in the first year they could charge 5% and reduce that to 0% in the 6th year.

No-Load Funds
Mo2 you're wrong! Not all mutual funds have a load fee. True, you may be right about that. But guess what, they make it back elsewhere. This is where we go back to the MER. Compare the MER of a no-load fund to a regular mutual fund that has a front-load or end-load and guess what? You'll notice most of the time that no-load funds have a higher MER, hmm... wonder why.

Mo2 Thinks
I guess you figured by now that I'm not exactly a huge fan of mutual funds. Although I do think mutual funds are a great way for smaller investors to start investing, even then I still think they should do their homework and look for individual stocks to invest in. I've never bought a mutual fund and most likely never will because I'm willing to take the extra step and be responsible and control my own investment portfolio.

Sure, I might not be able to own 25 stocks in my portfolio right off the bat. But over time you can build your own portfolio by keeping your costs at a minimum and yet possibly do better than fund managers. It can be done, and it all depends on how much time you're willing to commit to understanding the construction of your investment portfolio.

I see mutual funds as a lazy way to get into investing. I often see mutual fund managers have similar picks and generally similar views of stocks, that's because the larger funds are looking at the same things. Having said that, I do admire mutual fund managers that look at micro-cap or small cap stocks because that's extremely challenging. The only time I would probably look at mutual funds is to learn from what they are doing. Again, I'm not taking anything away from mutual funds or the managers because I think the idea of mutual funds is brilliant and the people that run them are exceptional. I really do mean this.

I know for a fact that there will be those that completely disagree with what I said. But just as how the discussion of the random walk theory is endless, this is too. I respect opposing views and would love to hear your opinion. However, I do not plan to write a 30-page paper on this. I vowed not to write any more illogically and needlessly lengthy papers after graduating university. So please don't tempt me to write a book on my argument. Anyhow, happy investing!

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If you would like to comment on this article or anything on this website, please feel free to e-mail Mo2. He can be reached at Mo2@Mo2Thinks.com. Thank you for visiting!