Mutual funds are an investment strategy that pools your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own. While mutual funds are right for some investors, they don’t work for everyone. Here’s why.
Diversification is a great way to manage risk. But, owning several mutual funds may not lower risk as you can duplicate stocks and sector concentrations as you add more funds. Plus, if you have several mutual funds, each with 100+ individual stocks, it’s difficult to track holdings and determine your actual diversification and risk.
Mutual fund portfolio managers have thousands of shareholders for every fund they manage and don’t communicate with each shareholder on a regular basis. When changes occur in fund strategy or securities are bought and sold, you’re typically not made aware of these changes.
In order to meet your goals, it’s critical that your investments are aligned with your specific objectives. Mutual funds have a strategy, style and portfolio allocations that meet the fund’s objectives, not yours. Time horizon, cash flow needs and growth expectations, etc. all play a critical role that your investments should address.
Mutual fund profits are subject to capital gains taxes which are distributed to individual fund shareholders. For this reason, you could end up paying taxes on gains even though you didn’t sell any shares or when the overall fund incurs a loss. It’s important to avoid unnecessary taxes so consider a custom investing approach instead.
Inside mutual funds are complex fees and expenses that can significantly impact your overall returns. Even “no-load” funds can charge management and other fees which are not transparent to investors. Hidden fees can have a big impact on your portfolio over time so it’s important to know the charges and fees in the fine print.
While mutual funds can be ideal for smaller portfolios, higher-net worth investors can benefit from a separately managed portfolio customized to individual needs. Tim McIntosh takes a personalized money management approach which offers several advantages over mutual funds.