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If we are trying to build our retirement fund, would mutual funds be beneficial?

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  Answers  |  1

December 13, 2015

For an investor with a long term time horizon, such as investing for retirement, mutual funds can provide a diversified portfolio. Because mutual funds are investment vehicles made up with pools of investors funds for the purpose of investing in securities such as stocks and bonds they can serve a viable means to invest for the long term. However, one should perform a careful due diligence before investing in any investment, even mutual funds.

For example, some mutual funds charge what is called a load. These fees are usually, though not always, charged at the time of purchase. They can run more than 5%.  For example, an investor may wish to purchase $1000 of mutual fund X.  And fund X charges a front end load fee at the time of purchase of 5%.  The investor’s investment is reduced by this amount. So instead of purchasing $1000 of mutual fund X the investor is only receiving $950 of the fund.  This load is used to compensate the broker.  These fees can add up if the investor is investing in this type of fund on a recurring basis.
In addition to the load fees or if the fund is a no-load and does not charge a sale fee, there are management fees.  These fees that can be more difficult to ascertain and are the fees charged to manage and market the mutual fund.  Yes, the mutual fund industry charges the fund shareholders a fee to market it to the shareholders. They are also used to compensate advisors to recommend them when the fund is sold as a no-load fund.  These fees are usually identified as management and/or 12b-1 fees in the funds documents.  The mutual fund industry average for these is about 1.3 percent.  The challenge investors face with management fees are they result in a drag on the fund’s returns.

In conclusion, investors can take steps to minimize the impact fees on their portfolio.  If, using mutual funds, either with an advisor or on their own, they should do their homework and ensure the fund achieves what they their looking to achieve at a reasonable cost. And perhaps look into low cost index mutual funds or ETFs as a means to reduce costs and meet their goals.

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