Mutual Funds - The Good, the Bad and the Ugly

Most investors know about mutual funds – they’re still the most popular investment vehicle in America, with approximately 52.5 million people, or 45% of U.S. households owning mutual funds. And most of us also know there are a lot of different kinds of them, but beyond those basics few of us know much more. It’s particularly important for women, who are rapidly becoming the nation’s primary household financial decision makers, to spend a little time learning the basics – nothing is more powerful than knowledge.

Although we could spend a lot of time delving into the structure of mutual funds, it’s most useful to start by understanding that funds can be grouped into two large categories: index funds and actively managed funds.

Index funds are setup to track a market index – well-known examples include the S&P 500 and the Russell 1000. The important word here is track. These funds are not designed to beat the market; their only purpose is to deliver returns in line with the market. The rest of the funds, designed to beat the market, are actively managed funds.

Beating the market sounds good, doesn’t it? So why shouldn’t everyone buy an actively managed fund? Consider this: In a given year, the majority of actively managed funds fail to beat the average return of the stock market. And for longer time periods the story gets even worse, with hardly any actively managed funds that beat the market year after year.

And here’s something most brokers will never tell you: the main reason actively managed funds so rarely beat the market is simple: fees. Check out my blog on Fees: What They Won't Tell You about the Fine Print for more.