2.9. Mutual Funds

“Mutual funds are open-ended pooled investment vehicles that collect money from many investors, invest it according to a stated strategy, and issue redeemable shares priced at Net Asset Value (NAV), calculated at the end of each trading day.” Source: ChatGPT

A mutual fund is actively managed by a fund manager that has a specific investment strategy. These fund managers do a lot of research and trade shares of companies on a regular basis, which results in high fees. All of these fees come at the cost of your profits.

We are definitely no fans of mutual funds since they often underperform the market, and charge extremely high fees for potential underperformance!

We therefore recommend not to invest in mutual funds, but to invest in index funds instead. Mutual funds have been in existence since the early 20th century.

Mutual funds solve three problems in investing:

  1. Capital pooling into one large portfolio;
  2. Professional fund management;
  3. Risk diversification;
Figure 1: Mutual Funds / Source: ChatGPT

If you would like to buy shares of a mutual fund, your buying order will be executed at the end of the day after the market closes.

The two major mutual fund providers are Vanguard and Fidelity, which have by far the most assets under their management.

Mutual funds are rated by their (past) performance by institutions like Morningstar.

The problem with these ratings can be that investors are “lured” by past performance, which is definitely no guarantee for future performance. Chances are high that if you buy into a mutual fund which has had top performance, it will perform poorly the moment you invest in it.

There are different types of mutual funds:

  1. Equity funds, which invest in stocks;
  2. Bond funds, which invest in bonds;
  3. Money market funds, which invest in short-term debt;
  4. Hybrid funds, which invest in stocks and bonds;
  5. Index funds, which invest in the total market and are passively managed;

There are also mutual funds which invest in specific industries such as technology only.

It is important to understand the difference between actively and passively managed funds. Actively managed funds require a lot of work (and buying and selling) from a fund manager, which results in high fees. Passively managed funds such as index funds require little work, don’t buy and sell their shares all the time, and have therefore very low costs and tax advantages.

There are tons of different fees and costs in mutual funds which are often poorly understand by investors like you and me. Mutual funds are marketing experts and often use vague words to try to disguise all the fees that they are taking from you.

Again, we do not recommend investing in mutual funds! They have extremely high costs, high taxes and often underperform the market. Fund managers must not only try to overperform the market, they must do so by a large margin to make up for all the costs!

We highly recommend to read the following books on mutual funds:

  1. The Little Book of Common Sense Investing by John C. Bogle;
  2. Money: Master The Game by Tony Robbins;
  3. Unshakeable by Tony Robbins;
  4. One Up On Wall Street by Peter Lynch;
  5. Unconventional Success by David F. Swensen;