Mutual Fund Traps

There are thousands of mutual funds available to investors. While some are good and can outperform the market, many consistently underperform the market. Generally, this is because the mutual fund is too large and the manager can not efficiently invest all of the money, the fees are too high, or the mutual fund manager is not talented enough to beat the market. Here are some key warning signs to look out for when investing in mutual funds.Loads and 12-b1 fees: : These are extra “marketing” charges a mutual fund lays on investors. Never invest in mutual funds that have these fees. These fees represent kickbacks and marketing expenses for the mutual fund to expand its investor base. Not only does this represent an extra expense to you, funds that are actively attempting to expand will perform worse in the long term due to having too many assets under management.Taking advice from a banker: Are you blindly taking the advice about what mutual funds to invest in from your local banker? Chances are, he’s trying to get you to invest in a mutual fund with a load, so he can get a kickback. There’s nothing wrong with talking to someone from your local bank about investing, but always do your own research and never agree to anything then and there.Investing in the hottest mutual funds: : Just because a mutual fund is succeeding now does not mean it will succeed in the future. It may have just gotten lucky by being focused on a particular sector type that had a good year. Furthermore, mutual funds that perform well tend to get a fload of assets invested in them, which then makes the mutual fund too bloated.
Roger is a writer for Research Mutual Funds, a site that can help you find mutual funds with top performance.