Finance

What is a Mutual Fund?…and Why do I Hate Them?

what-is-a-mutual-fund-and-why-do-i-hate-them



Mutual funds were a revolution in 1924 but will destroy your money today! I’ll show you how mutual funds work, give you the pros and cons of fund investing then reveal an alternative that will grow your portfolio.

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What is a mutual fund? These investment companies hold shares of hundreds of stocks or other assets and then sell shares of the entire group to investors. Mutual funds allowed millions of Main Street investors to start investing in the stock market without having to pick individual stocks and more than 70 million have invested in a mutual fund since the first in 1924.

How do mutual funds work? The portfolio manager buys a group of stocks or bonds according to an objective and a mandate. The objective might be to grow the portfolio value or to produce regular dividends. The mandate is the group of investors the manager can buy to achieve that objective, for example investing in stocks of a certain sector or company size.

Mutual Fund Basics – The mutual fund sells share ownership in this pool of investments. Buying a share of the mutual fund entitles you to a fraction of all the money distributed and the investments held. For this, the manager charges an annual fee and there may be other fees when you start investing.

Pros of mutual funds include that instant diversification you get with a group of stocks or bonds. It’s stress free because you don’t have to worry about the fund, it’s going to produce close to a market return and no single stock will hit the returns too badly. You also get professional management of your money.

But there are also some very big cons to mutual funds including high fees charged to investors. Besides an expense ratio and account fee that can cost you 2% of your money every year, there are sometimes also sales fees that can take as much as 5% of your money off the top before you even invest. Mutual funds will also cost you more in taxes because the fund distributes capital gains each year, whether you sell shares or not.

Mutual Funds vs Exchange Traded Funds (ETFs) is where you want to start when thinking about investing in mutual funds. ETFs were created to solve a lot of the problems with mutual funds like the high fees charged. By comparison, ETFs usually only cost a 0.5% expense ratio annually and some may be as low as 0.1% annually. That’s less than half the fee you’ll pay on mutual funds and not including all the other fees. ETFs are also less costly come tax time and you’ll be able to buy or sell them like stocks.

Want to do Better than a Mutual Fund…don’t miss these videos on ETF investing!
How to Pick an ETF and 3 Best ETFs Every Investor Should Buy! https://youtu.be/_sSCxvsK8yg
My 3 Favorite Monthly Dividend ETFs for Financial Freedom! https://youtu.be/hF43_i-co-4

There is one situation when I would say go ahead an invest in a mutual fund…when you basically don’t have a choice. If your work-sponsored 401K only offers mutual funds with the company match, it’s still the best investment you can make. Getting that company match is free money even if you have to pay higher fees with a mutual fund.

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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.

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Robert Dunfee

38 Comments

  1. Let's Talk Money! with Joseph Hogue, CFA
    July 17, 2021 at 7:45 pm

    How many shares of stock do you need to buy for $1,000 a month?!? 💰 Answer here https://youtu.be/GnAuLqO6bfs

  2. Petar Moskov
    July 17, 2021 at 7:45 pm

    Thank you for the video! With all the focus on ETFs in this day and age, I had all but forgotten about mutual fund.
    Some questions I have about investing: How would one determine how to weigh the securities within their portfolio based on their risk profile? Is there an optimal strategy for dividend income vs dividend growth, or can there be a happy medium? What about when you're trying to maintain a well diversified basket without over reaching?

  3. Derek Fredericksen
    July 17, 2021 at 7:45 pm

    Joseph I've lost a ton of money

  4. Monika Didluch
    July 17, 2021 at 7:45 pm

    What options do have then when most of the employers offer ONLY mutual funds or target date funds?

  5. K k
    July 17, 2021 at 7:45 pm

    Hi Jo, can you talk about the capital gain tax, withholding tax etc., because I am not a US citizen, and the US govt dividend withholding tax etc

  6. Sam
    July 17, 2021 at 7:45 pm

    Another great and informative video. Thanks Joseph!
    Question I have and not much info on Youtube I found is how to find balance between Investing and Taxes. People buy and sell stocks every day but no one talks about taxes.
    I would like to learn from you about best practice.
    I am a newbie in personal investing and started my journey with David Swensen (Yale) portfolio: FSKAX, FSPSX, FPADX, FUAMX, FIPDX, FSRNX:

  7. TheBennyDON
    July 17, 2021 at 7:45 pm

    I am based outside the US and I would really appreciate a video aimed directly at us international retail investors. Specifically rules to watch out for and how to maximize our returns in the states

  8. Nathan GrandMaster K
    July 17, 2021 at 7:45 pm

    I have been buying mutual funds for years. I think you may have just changed my mind.

  9. Gunnut71
    July 17, 2021 at 7:45 pm

    Joseph,
    My company offers a 401K but does not match, should I stop putting money into the 401K mutual funds and just start investing in a retirement acct. with E*Trade? I already have an acct. with them in which I invest 15% of my NET income.
    Thanks,

  10. William Murray
    July 17, 2021 at 7:45 pm

    What about Mutual Funds in my Roth IRA? No taxes on gains and dividends in a Roth, right?

  11. Max Llorente
    July 17, 2021 at 7:45 pm

    I read the discription quicker then the video can lay it out for me lol thanks for clearing my mind on mutal funds and ETF's.

  12. Tim Stevenson
    July 17, 2021 at 7:45 pm

    Some people say that a small company called Bantec may provide some massive gains. People should look into it. It’s so cheap for those we can’t afford to buy into large companies

  13. David Rodriguez
    July 17, 2021 at 7:45 pm

    Nice video, thanks.
    Do you have a video explaining taxes on MF, ETF and stocks?

  14. Mr balloonpimp
    July 17, 2021 at 7:45 pm

    As for what I'd like to know are three things

    What is your background and expertise in this industry?

    What is the downside from creating your own "fund" vs a mutual fund?

    Whats with the bow tie??? You should get one that spins! I can help you with that if needed.

  15. R D
    July 17, 2021 at 7:45 pm

    VFIAX and VDIGX are the only Mutual funds i care about.

  16. Grace G
    July 17, 2021 at 7:45 pm

    Welcome back!

  17. Henry ol
    July 17, 2021 at 7:45 pm

    Hello Joseph can you look this company Avianca (AVHOQ) they when bankruptcy and chapter 11 and was approved. Now what will happens with the stock and will apply to al companies with chapter 11? Sorry I ask because I put money there because it was a airline they always get bailout

  18. LuigiFan1305
    July 17, 2021 at 7:45 pm

    I disagree with mutual funds being bad and high fees. Fidelity has great performing mutual funds with 0.05% expense ratio FXAIX & FSKAX. Plus mutual funds allow partial shares and automatically reinvest the dividends unlike ETF's. Better value and more user friendly for average investors.

  19. Da Bx
    July 17, 2021 at 7:45 pm

    Bro maybe memorise some of what you’re going to say? I can literally see your eyes moving across your script and it’s becoming disconcerting.

  20. D Roach
    July 17, 2021 at 7:45 pm

    What would you suggest to invest into instead of putting money into a traditional savings account?

  21. Roy Hood
    July 17, 2021 at 7:45 pm

    Can you talk about overstock, baba, gush and Xom? Thanks!

  22. Jeff J
    July 17, 2021 at 7:45 pm

    In my 401k there are a lot of dog funds but there is one genie fund. That is fdyzx. I will keep maxing it out until I retire in its green dollars.

  23. Brian M
    July 17, 2021 at 7:45 pm

    How to understand a company's balance sheet

  24. N K Abbi
    July 17, 2021 at 7:45 pm

    Hi. With the current general market (U.S) being more volatile than before, would you suggest it still makes sense to make a trailing stop loss order on stocks that you buy, believe in and want to keep long term, or no? Sorry, I know this is not the same topic as what the video is discussing.

  25. Ebay Addicts
    July 17, 2021 at 7:45 pm

    Lets go ⛄⛄⛄

  26. Mathias Perroni
    July 17, 2021 at 7:45 pm

    Hey Joe, following your dividends portfolio videos. Looking forward to an update. As always, I admire your time and dedication

  27. Daniel Grgic
    July 17, 2021 at 7:45 pm

    Dave Ramsey has taught me a lot, but I just can’t get behind the mutual fund only ideology. He can make buying individual stocks seem like financial suicide.

  28. JC Ottavianelli jr
    July 17, 2021 at 7:45 pm

    what is the difference between a Roth account vs regular account let's say in the webull setup

  29. ryanime20
    July 17, 2021 at 7:45 pm

    Joseph is so nice to the future me.

  30. Seymour Whitetail
    July 17, 2021 at 7:45 pm

    What do you think about Fidelity target date funds Joseph?

  31. Robert
    July 17, 2021 at 7:45 pm

    So I have a mutual fund in a roth ira the money is from my inherentance. I do not want to sell. But I am about to. The mutual fund follows the s&p500. I am sure I can but like voo

  32. Tom Jones
    July 17, 2021 at 7:45 pm

    Another helpful video. The only mutual funds I hold are through my 401k and that's only because I'm fully matched with my employer. If my employer didn't match 6% I probably wouldn't bother., and would stick to stocks.

    But from what I've learned this year watching your videos and doing my own research, I'm convinced I can outperform these mutuals funds on my own and that's my goal going forward. I'm going to let them ride, taking full advantage of my employers 401k match, but manage my own account that will (hopefully) avg higher returns.

    EDIT:
    your note about taking advantage of the 401K match is spot on. I give 9% and he matches 6% — that's a lot of free money. If he only matched 3% I probably wouldn't bother, and would manage everything myself. So yes, take full advantage of your employers 401k match.

  33. Robert C Lynch
    July 17, 2021 at 7:45 pm

    I own 6 high quality OEIC funds that are pretty low cost to run. Would you class these as mutual funds?
    I like that they are more difficult to buy and sell because they're more ideally suited to long term 'savers' and I'm less likely to respond to the emotions of the market. All of my funds are passive because I'm confident in my own ability at choosing what to buy.
    I do own a couple of specialist ETFs, but as I can buy or sell these in a heartbeat, I feel that it's more tricky to hang on to these for the longer term.

  34. DreadMike73
    July 17, 2021 at 7:45 pm

    I was going to get a mutual fund years ago, but when I found out about the fees, they have way too many fees and the fees alone will eat away at your gains, no thanks, I'll invest in ETFs, ETN, individual stocks, bonds, and REITs.

  35. brett vandortrecht
    July 17, 2021 at 7:45 pm

    What are thoughts on the government tsp?

  36. Dudarino
    July 17, 2021 at 7:45 pm

    Well, there are expensive ETF's as well: ARK's, MOON, ESPO – there are hundreds of them and they have 0.75%+ annual fee

  37. Mr B
    July 17, 2021 at 7:45 pm

    Please bring cheap growing stocks ….we love to hear about growing stocks thanks

  38. younes lasfar
    July 17, 2021 at 7:45 pm

    As a new investor, really enjoying your videos. Any 2021 growth stock suggestions ?