Mistakes With Mutual Funds
We hope that you have certainly benefited from this mutual fund mini-course and now have a knowledge of investing in mutual funds. Always remember that while investing is a great way to grow your wealth, there are also many pitfalls that trap the investor. New, relatively inexperienced investors need to learn how to navigate around these traps while climbing the learning curve. With that said, we have compiled a list of mistakes mutual fund investors make to help and give you a guiding hand!
1. Chasing Money
Most mutual funds are actively managed, and there will be a few managers who happen to be one off superstars in a specific year. New investors often ignore rules and chase this group of managers, in hopes that he can bring them the biggest return. However, past performance is no guarantee of tomorrow’s success and we have heard that over and over again. In reality, less than a fraction of the so-called “superstar” managers were able to retain their status over a long period of time. Most fade into obscurity. It always makes more sense to look at long-term historical record when selecting funds.
2. Paying Too Much
There is a good reason why fund managers are some of the richest people on Earth. The reason is simply because investors pay them a hefty sum, new investors often fail to take them into account when planning their investment for the long run. Mutual fund investing is often layered with high expense ratio, hidden costs and sales loads. It is important that the investor pay close attention to all the miscellaneous fees involved. Remember that a compounding 5% cost can snowball into a huge amount 20 years down the road.
3. Leaving Out Taxes
Every investor should learn to be familiar with taxation policies. When a piece of share, bond or asset is sold a capital gain is generated. Capital gains are entitled to taxation and many investors simply aren’t careful enough to notice this. When picking a mutual fund, you might not want to invest too much into those that frequently buy and sell assets in high frequency. The amount of taxation generated through these processes will eat a non-trivial amount into your overall profits.
4. Picking the Wrong Fund Manager
We failed to mention this in the chapter before but this is a great place to bring it up. We know that the right fund manager can absolutely do a lot of great work for you. However, what we failed to touch on is that the wrong kind of fund manager is counterproductive to what you are trying to achieve. The reason is because fund managers do not get paid for performance, period, they simply collect fees from investors. This also means that to some fund managers, their biggest incentive is not to ensure that your money is growing, but to bring in more money. This is also why choosing the wrong fund managers may result in a costly conflict of interest. What you need to do is research thoroughly and as always, verify that the fund manager is reputable and has a long history of winning for his or her clients.