If your answer is YES. Then I hope this post will give you some perspective on mutual funds.
Mutual funds are commonly referred as actively managed funds, and managed by fund managers. While an investor would normally look at a mutual fund based on it's past performance and risks, the fund performance might look very attractive, yielding high profit…
But there are something much important that you need to know when you are investing in a mutual fund, where new investors often overlook in the fund prospectus.
- an initial sales charge or redemption charge, whichever applicable, are calculated as the percentage of the NAV of the fund, would normally range from 1-6%, the fee is charged whenever you buy or sell or redeem the fund, subject
- while you are allowed to switch and change to another fund, but with a fee of 1-2%. This will further reduce the overall profit.
- a fee paid for by the mutual fund, or management fee charged by the fund manager, this will further reduce the overall return. The average would be around 1-2% for an actively managed fund.
All the fees above will affect your overall return, and in fact, there's a study on Percentage of Actively-Managed U.S. Equity Funds that Beat their Benchmarks
Source: Vanguard, “The Case for Indexing” April 2012; S&P SPIVA 2012 Report, The Power of Passive Investing, Wiley, 2011
The reason why many investors now opted for a low-cost index fund, because over the long periods, the actively-managed fund added costs and expenses would erode the fund performance. Also, take a look at my earlier post on Why study the stock market and stocks?