Why do many investors feel they get poor results from Mutual Funds?
Many investors feel that the results they get from investing in mutual funds are very poor and sub-par compared to their investments in individual stocks.
I am interested to hear more aspects to this question than just "Because the results of mutual funds are very poor". If that is the only reason, please share why those results are so poor.
Anytime you have 30 or more stocks, the potiental for upside as well as the downside will be limited compared to 2 stocks.
A mutual fund manager also has to be careful about selling stocks and creating tax consequences for the investor. Each time he sells stocks that made a profit, the investor will get a tax bill for those sales. Therefore a mutual find manager in most cases just keeps those stocks and invests new money in the other stocks in the fund to re-balance or adds a new stock. Therefore the dog stock remains in the fund.
Finally a mutual fund usually charges between 1%-2% aannual maintenance fee which will add up to 10%-20% over 10 years. In my opinion it is better to invest in ETFs since the maintenance fee will usually be much lower.
Hedge funds are the worst. They typically charge 2% per year plus 20% (up to 50% on some funds) of the gains (collected monthly). Then they usually also very actively trade the stocks in the fund causing all the gains for the year to be taxed as short term gains. Therefore if the market averages 8% in a year, the hedge fund manager is expected to make at least 16% giving the investor a return of about 8% after fees. If the fund doesn’t do that, the investors pull their money.
Example:
16% gain in fund.
2% annual maintenance fee.
20% of 14% = 2.8% gain fee.
Proceeds to investor account 11.2%
33% tax on 11.2% = 3.7%
Return to investor after fees and taxes = 7.5%.
Christian Baha’s managed futures hedge fund (SuperFund) for the average investor was even worst. They charged 8.75% in annual fees plus a 20% gain fee. After 7 years, it returned zero after taxes to it’s investors while the conservative dow returned about 30% during the same period of time.
i am assuming that you have an idea of how mutual funds work. An investor puts in money into the fund, the fund pools in a lot of cash from other investors and uses this cash to invest in securities like stocks bonds etc. What happens is that after the fund gets returns from the investments they make, they cut their fees before distributing the remainder to the investors. Mutual funds have so many small hidden fees that cut into their profits thus making the amount awarded to investors much smaller than it should be. It goes without saying that when you invest in individual stocks, your returns are higher because you do not have to pay so many fees. This is why most active investors shun mutual funds for investment in individual securities. Hope this helps
I will never own one again!!! Besides poor the performances the management fee’s will eat your money up. Your much better off trying to invest in the market on your own.