Take Note of These Before Buying Mutual Funds
Many South Africans invest in mutual funds. Some of these mutual funds are cheap and all are regulated thus give investors some comfort in putting their money in such funds. Due to their price, millions of investors have assets in mutual funds. However like many other investment products, mutual funds are not perfect. It is therefore not surprising that many funds:
- Underperform the market,
- Overcharge investor,
- Create tax headaches and
- Suffer erratic swings in performance.
Therefore an intelligent investor should chose funds with great care in order to not end up with a great mess.
How do you buy mutual funds? If you follow the crowd, the likelihood is to simply buy funds that moves up fast based on the assumption that past trend will continue. The question is, why not? If you and I know from our experiences that our favorite restaurant serve superior food most of the time, smart kids get consistent good grade. Skills and brains and hard work are recognized and rewarded consistently around us. It might sound plausible from this perspective that we should put our money in funds that beat the market as they are likely to do it consistently.
Unfortunately, old school teaches us the contrary when it comes to investing and financial markets. An old saying goes thus:
“Luck is more important than skill when it comes to financial markets”
For example a fund manager who happens to be at the right side of the market at the right time may look so brilliant. The market might change and the same fund manager looks stupid the next day. Therefore buying funds based simply on their past performance might be one of the stupidest thing an investor can do.
Things to take note of when buying mutual funds summaries from the works of financial gurus over many decades.
- The average funds does not pick stocks well enough to overcome its costs of research and trading them.
- The higher a funds expenses the lower it’s returns
- The more frequently a fund trades its stock, the less it tends to earn.
Highly volatile funds, which bounce up and down more than average, are likely to stay volatile.
- Funds with high past returns are unlikely to remain winner for long.
Understanding the challenges involved in finding a good fund will make you an intelligent investor. Given that past performance is a poor predictor of future returns, there are other factors that can be used to find good funds.
Read my next article on mutual funds to get more about other factors that can help you pick winning mutual funds.