Debunking Mutual Fund Naysayers

Mutual funds have consistently offered great returns over the long periods of time for several decades now. They take away the risk of investing in single stocks and are a great way to have a diversified portfolio and still make average rates of returns from 12-18%. There are still some people, most of them pushing other investments, that would have you believe that mutual funds should be avoided. They'll make all sorts of arguments telling you that the numbers aren't as great as they say they are, and that mutual fund managers are the only people actually making any money. Let's take a look at some of these arguments that people use against mutual funds and see if they hold any weight.

You will hear very often that mutual funds won't grow exponentially because the investments that are doing well will be held back by the ones that are doing poorly. Investors in individual stock looking for that one hot pick often use this argument to dissuade others from investing in mutual funds. Unfortunately our single stock investor has completely and utterly failed to take risk into the situation. You could be pretty much guaranteed a rate of return of 15% over a long period of time, or have a small percentage chance of making much more. In the end the person investing in solid mutual funds will on average make more money than the individual investor.

Other critics contend that it's unfair that mutual fund managers take a percentage of your money each year just for the benefit of having it. That doesn't sound very fair, does it? Other investments just grow, why should one pay a percentage of their money each year just to have it invested? I have a Roth IRA opened at Vanguard and am inveted in the Vanguard Target Retirement 2050 fund, which has an expense ratio of 0.21%. In the last year, the mutual fund has increase by 19.92% in value. I think the $8.40 I spent was well worth the $796.80 that I made from the investment. Sure you're paying a little bit of money for your investment, but you're getting a great rate of return. Most other investments have their own fees which are hidden in various ways, and mutual funds are still on the less expensive side of investing.

Many criticize mutual funds because they believe that mutual fund companies kill off poorly performing mutual funds and only keep the good ones, skewing the success of their investments. Think about it, let's say a company started out 50 years ago with 10 mutual funds, 5 of them did amazing, and 5 of them did very poorly. If the company got rid of the 5 that did poorly, they would have 5 mutual funds to market that have a great track record and nothing else, making it seem like you can't go wrong investing with them, when in reality they've had mixed success. The problem with this argument is that you are not investing in the mutual fund company's entire line of funds, but rather on an individual investment. It doesn't matter what all of the other funds did, it matters what the fund you're interested in did over a long period of time. If there's a specific strategy that's worked very well, there's every reason to following it.

These are just a few of the big talking points of people who trash mutual funds. Most of the arguments made have an equally strong counter-argument, and any of the problems a mutual fund might have can be avoided by doing some basic research and choosing a mutual fund wisely.