Retail Mutual Funds

Retail mutual funds were created to serve the needs of small investors. Unfortunately, the financial services industry has created a multi-billion dollar per year industry by marketing these products to all investors alike. Retail mutual funds pose a number of challenges for affluent investors:

  • Performance. Historically, as many as 85% of all retail mutual funds have under performed their associated benchmark index over significant periods of time.
  • Fees. Investors in retail mutual may incur many different types of expenses (some stated, some hidden) including loads, marketing fees, and management fees. Combined, these can add up to 2.0% - 3.0% per year in annual expenses for shareholders.
  • Style Drift. Retail mutual funds are notorious for changing investment styles over time. In the 1970s, Fidelity Magellan owned mostly small company stocks. Today, this same fund owns nothing but the largest international corporations. Investors can never be sure that their underlying portfolio is capturing the intentions outlined in the fund perspective.
  • Unpredictable Cashflows. Like all pooled investment vehicles, retail mutual fund shareholders are affected by the unpredictable deposits and withdrawals made by other individual investors. If undisciplined shareholders redeem their shares during a market correction, the fund manager may be forced to sell stock at a loss to fund those redemptions. In these situations, every shareholder suffers equally--even the buy and hold investors who do not redeem their shares.
  • Tax-Management. Retail fund managers rarely consider taxes when making investment decisions. A fund that posts impressive performance at the expense of short-term capital gain distributions will be particularly costly to affluent investors. In addition, mutual fund management fees are not tax-deductible expenses like private portfolio management fees.

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