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What Your Mutual Fund Company Doesn’t Tell You


There are many reasons a Mutual Fund company might withhold useful or even essential information from a customer. Here are ten of those reasons.

1. Contrary to most products and services, when it comes to buying Mutual funds, cheaper is better if the fund can be expected to perform better in the next five years than in the past five years. The Mutual Fund Company profits from selling higher cost products, but the investor should know that a low price for a mutual fund usually signifies a better quality product.

2. Similar to batting .300 or recording a platinum album, the mutual fund manager’s goal is to beat the market. That means if S&P’s index is up 10 percent, the mutual fund manager’s index should be up 11 percent. Even so, most mutual fund managers do not beat the market, though few admit it.

3. The least discussed element contributing to the success of a mutual fund manager is luck or the law of averages. The bigger the numbers of individual funds (which can be relatively cheap to manage), the greater the probability that a few will actually be lucky enough to beat the market.

4. The present tight economy makes stocks that just equal market benchmarks more attractive than stocks that beat the market. Most analysts do not expect this trend to last longer than a turn for the better in the economy.

5. One of the most important deterrents to pricier stock picking is cash paid to intermediary brokerages who pay financial advisers to sell their funds. Some call this system kickbacks and cover the obvious purpose of such payments as earmarking them to cover record-keeping costs or calling them revenue sharing.

6. Hedge funds make their managers happy, but not necessarily investors paying much higher fees for hedge funds than for conventional mutual funds.

7. The board of mutual funds are supposed to supervise trading practices and ensure fees are competitive, but in fact, since boards meet only two weeks out of any year, they are more figurehead than actual working supervisors. Being investors in the company themselves is no guarantee of board protection of shareholders.

8. Mutual fund boards also have disproportionate influence in approving executive pay, since mutual funds collectively own about one-quarter of all U.S. stocks. But boards that typically work only two weeks out of the year do not spend a lot of time worrying about inflated executive salaries.

9. The collapse in 2008 of the Reserve Fund was the most important contributing factor in the financial crisis that year, but the federal government’s guarantee of $2 trillion in money-market fund holdings was the most important action taken to hold the whole system together before Congress passed the bailout bill.

10. Ways and means to ensure that the government will never again have to backstop money market funds is one of the few financial reform issues on which both liberals and conservatives agree.

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What Your Mutual Fund Company Doesn’t Tell You


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