Investing in mutual funds may not be as attractive as it used to be! There's an industry-wide shift occurring that is certain to affect you. Across the board, mutual fund companies are imposing redemption fees. Whether you invest in no-load funds, big funds, small funds through your 401(k), understanding these changes is essential. The year old 'Mutual Fund Scandal' exposed a number of problems within the mutual fund industry. The crux of the problem was the fact that mutual funds were treating large, multi-million dollar Hedge-fund traders differently than they treated their average investor. Some mutual funds allowed these Hedge funds to move in and out of the mutual fund quickly, often only remaining in the mutual fund for a few days at a time. This has been referred to as market timing.
The problem is that market timing it not illegal. The problem occurred when the mutual fund stated in it's prospectus that it did not allow that activity while they secretly allowed privileged investors to do it anyway. For instance, large hedge funds would move millions of dollars into a mutual fund one day and sell it out the next. This gave the mutual funds increased fees while hurting the return of their regular investors. In response, the SEC has proposed a number of rule changes. One rule would require mutual funds to impose a redemption fee when a sale occurs within five days of purchase. Unfortunately, many mutual fund companies have seen this as an opportunity to impose new fees that make it harder for you to move your money elsewhere. So the SEC's involvement has had the unintended effect of increasing costs and reducing flexibility for the average mutual fund investor.
When you invest with a mutual fund, you are given the ease of selection through just a click of a mouse. There are hundreds of different types of mutual funds available for your consideration. You should research on which type works best for you as an investor. What you should be looking out for is a particular type of mutual fund that has fewer risks, gains you the amount of money you want, and the period of time you are willing to wait. You can easily communicate these to your fund manager who can adjust your investments according to your preferences.
Worse, the big mutual fund 'supermarkets' are imposing their own redemption fees. Charles Schwab One Source has begun charging a .75% redemption fee for sales within 6 months of purchase. TD Waterhouse charges .50% for sales within 90 days of purchase. Fidelity imposes a $75 fee or .75%, whichever is greater, if the redemption is done by phone within 6 months of purchase. Interestingly, Fidelity does not impose a redemption fee on Fidelity's own mutual funds! This begs the question--if short-term trading is so bad then why doesn't Fidelity impose the same redemption fees on Fidelity mutual funds?
Not much is lost by computing risk-adjusted returns in this manner and the result is much more useful to the general public. What is lost is the measure of excess returns, but that isn't the objective of computing risk-adjusted returns. Rather, the objective is to compare mutual funds on a relative basis in terms that are meaningful to the average investor. As long as the funds that are being compared are similar in nature and their returns cover the same period of time, using the risk-adjusted return for comparing mutual funds is reasonably reliable basis for selection that will lead you to the same selection as the Sharpe ratio more often than not. However, as the possibility of a sub-optimal selection exists, it's best to use go one more step with the quantitative analysis.
Lastly, investing with a mutual fund offers convenience and protection for you as an investor. You can sell your liquid assets quickly and easily through a mutual fund which means that you can earn and get your money in just a matter of days. You also do not stand to lose money to other shareholders since you possess certain rights being a shareholder yourself. Try investing in mutual funds and experience the ease and safety of investing.
The problem is that market timing it not illegal. The problem occurred when the mutual fund stated in it's prospectus that it did not allow that activity while they secretly allowed privileged investors to do it anyway. For instance, large hedge funds would move millions of dollars into a mutual fund one day and sell it out the next. This gave the mutual funds increased fees while hurting the return of their regular investors. In response, the SEC has proposed a number of rule changes. One rule would require mutual funds to impose a redemption fee when a sale occurs within five days of purchase. Unfortunately, many mutual fund companies have seen this as an opportunity to impose new fees that make it harder for you to move your money elsewhere. So the SEC's involvement has had the unintended effect of increasing costs and reducing flexibility for the average mutual fund investor.
When you invest with a mutual fund, you are given the ease of selection through just a click of a mouse. There are hundreds of different types of mutual funds available for your consideration. You should research on which type works best for you as an investor. What you should be looking out for is a particular type of mutual fund that has fewer risks, gains you the amount of money you want, and the period of time you are willing to wait. You can easily communicate these to your fund manager who can adjust your investments according to your preferences.
Worse, the big mutual fund 'supermarkets' are imposing their own redemption fees. Charles Schwab One Source has begun charging a .75% redemption fee for sales within 6 months of purchase. TD Waterhouse charges .50% for sales within 90 days of purchase. Fidelity imposes a $75 fee or .75%, whichever is greater, if the redemption is done by phone within 6 months of purchase. Interestingly, Fidelity does not impose a redemption fee on Fidelity's own mutual funds! This begs the question--if short-term trading is so bad then why doesn't Fidelity impose the same redemption fees on Fidelity mutual funds?
Not much is lost by computing risk-adjusted returns in this manner and the result is much more useful to the general public. What is lost is the measure of excess returns, but that isn't the objective of computing risk-adjusted returns. Rather, the objective is to compare mutual funds on a relative basis in terms that are meaningful to the average investor. As long as the funds that are being compared are similar in nature and their returns cover the same period of time, using the risk-adjusted return for comparing mutual funds is reasonably reliable basis for selection that will lead you to the same selection as the Sharpe ratio more often than not. However, as the possibility of a sub-optimal selection exists, it's best to use go one more step with the quantitative analysis.
Lastly, investing with a mutual fund offers convenience and protection for you as an investor. You can sell your liquid assets quickly and easily through a mutual fund which means that you can earn and get your money in just a matter of days. You also do not stand to lose money to other shareholders since you possess certain rights being a shareholder yourself. Try investing in mutual funds and experience the ease and safety of investing.
About the Author:
Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Hard Money Banks And Regular Mortgage Brokers - How They're Different You have full permission to reprint this article provided this box is kept unchanged.
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