Recently investors have started to question whether mutual funds are as sound and as profitable as they once were, or are they just investment vehicles that are too expensive to own? With many new alternatives to the traditional actively managed mutual funds such as index funds and ETF’s, why should investors still look to mutual funds for their diversified investment portfolios?
The three main reason’s why I purchase mutual funds for my clients are for diversification, gaining access to professional management and obtaining investments in parts of the world that I have less access to. If an investor has a smaller portfolio whereby it would be difficult to create a diversified portfolio out of individual securities, mutual funds can provide that investor with the diversification they require. Thus, through a mutual fund an investor would not be investing their money into just one security but perhaps 50 or 100 different securities therefore lowering their risk.
Many advisors (including myself) would say that when you purchase a mutual fund, you are “buying the manager” of that fund. If a mutual fund manager does his job effectively, they will be able to help the investor navigate through the tough times and create growth in periods that the market outperforms. There are many good performing mutual funds with a long history of success. A big positive for mutual funds is that they provide the average investor an opportunity to have an experienced money manager make all the changes to your portfolio on your behalf. You will not have to manage the money yourself.
Certain international mutual funds provide access to investments in parts of the world we would not otherwise know much about while living in Canada. Investments in Asia, Europe and South America, are a lot more difficult to make on your own than through someone who is experienced in investing in those regions. If you have a good international mutual fund manager you trust, who has visited the areas he is investing in and truly understands the markets he is buying into, then that fund can provide great diversity and extra growth to an investors portfolio. Today there are many countries in the world that are outperforming Canada (e.g. China and Brazil). Canada as a country only makes up about three per cent of the world wealth. Having investments in other countries can benefit an investor as they have provided tremendous growth at certain periods of time (if you can handle the risk).
The biggest criticism investors have against mutual funds is the MER (manager expense ratio) the mutual fund company charges on each fund. I find that investors tend to dwell on these fees quite often. These fees tend to cost the average mutual fund investor between two and three per cent each year. If you were to look at the average rate of return for some of the outperforming funds you will find that many have been producing well above the amount of the fee being charged. Therefore if you are in a fund that charges a fee of approximately 2.5 per cent, and you are earning 10 per cent after the fee has been taken off, why would that fee be an issue? I believe all investors would pay 2.5 per cent to make 10 per cent on an annual basis. If an investor is still earning an acceptable rate that they are happy with after fees then they should continue to hold that mutual fund.
Some investors believe that they cannot make good returns with mutual funds and would rather own individual securities. This too is incorrect. The type of mutual funds you own will dictate the types of returns you should expect. As with individual securities such as stocks, each mutual fund has its own risk rating. The higher risk funds tend to be funds that invest in one area such as a technology fund. The medium risk funds tend to be more generalized in their underlying investments and the low risk funds tend to have more fixed income or bonds inside of them. Thus each fund’s makeup will dictate the returns and volatility an investor should expect. It is very possible to do well with mutual funds. You are just buying a basket of products versus just one product.
I believe that good actively managed products can outperform the passively managed ones. A mutual fund manager is not tied to an index and is free to make changes as he or she see fit. They sell or buy when they believe the markets warrant it. The fees may be a little higher but I think if you have a good active manager, the fee will be worth it.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at firstname.lastname@example.org. I will be glad to speak with you!
– Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities.