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Mutual Funds Are Like Friends: Choose Wisely

January 19, 2023


Mutual Funds are arguably the most common vehicle used by the Investing public to access both stock and bond markets. While they are used by millions of investors in 401K plans, IRA’s, brokerage accounts, Trusts and so on, relatively few users understand them well. Here we will take a quick look at what mutual funds are, and some things to look out for when investing in them.

Put simply, mutual funds are pooled investment vehicles which facilitate a group of investors putting their money together to invest in markets in a diversified manner with professional management. This provides great advantages for smaller investors who otherwise would have limited access to diversified strategies, and professional investment management.

Mutual funds cover a variety of investment styles and strategies. They may be composed entirely of stocks, bonds, or a blend of both. They may specialize in small companies, international investments, real estate, or alternative strategies. The breadth of the mutual fund market is vast. A qualified advisor can help you create and implement a strategy to assure you are invested appropriately for your life stage and long-term needs.

It is important to note that not all mutual funds are created equal. Invest only in funds of high quality, with disciplined management and high tax and expense efficiency. Many funds generate sub-par returns when compared to the indexes they are measured against and are simultaneously costly to their investors. I see this often in funds that attempt to “beat the market” by trading in investments the managers perceive as “winners.” These funds often under-perform, and their high-frequency trading frequently leads to high costs and low tax-efficiency. It is critical to ask your advisor questions about the funds they recommend: track record, strategy, management team, internal costs and tax efficiency are important considerations. High costs and taxes take money from your pocket. A fund’s long-term benefit to investors is determined more by tax and cost efficiency than a high headline return. If a fund with high internal fees is recommended, there should be a clear and apparent value-add to justify it. A good advisor should always be happy to discuss these issues with you and help you understand how your money is being invested.

While areas of concern exist for any product, mutual funds play a valuable role in providing market access to investors and have helped generate and protect wealth for generations. A portfolio of high-quality,ta x and fee efficient funds may create myriad advantages for investors. Risk management through diversification is an excellent example. Also, investors may access many markets that would be otherwise difficult to enter. Quality management teams adhering to solid principles reliably generate solid value for their investors.

Mutual funds are like many other products we purchase. Quality matters and we should always strive to be wise consumers. A little homework and asking good questions will help assure your portfolio is tailored to your needs and provides value for your money.

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Securities provided by VeraBank Wealth Management are not deposits of VeraBank, are not FDIC insured, have no financial institution guarantee, and may lose value.

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