Are Mutual Funds A Scam?

If you only know one thing about investing, you probably know about mutual funds. And there is a good reason for that. The financial industry makes billions selling and managing mutual funds, primarily because they charge high fees and deliver no value. This is especially true for actively managed funds where you pay high fees for the supposed skill and experience of a manger who buys and sells stocks in the that make up the fund. But, there are alternatives that the average investor can take advantage of, like index funds, and exchange traded funds. It just requires a little bit of work and knowledge.

It's all about the money, and high fees. Mutual fund companies take advantage of your ignorance about investing to make money for themselves. They give commissions to sales people ( or investment advisers as they are known ) to sell you their products. Then, every year, you pay the mutual fund company a percent in fees ( often 1.5-2.0%).

They justify these fees by saying that their funds are managed by experts who will help you outperform the market. The problem is that after the fees, their management decisions are worthless, as Forbes describes in an article:

Countless studies have shown that only a handful of managers can beat the market consistently in the long run. This is largely due to the weight of their fees, usually four times as much as those charged by index funds.

Imagine you invest $3,000 in a mutual fund that skims $30, or 1%, in annual fees. If the market grows by an annual average of 8%, your $3,000 will grow to $16,000 in 25 years. That sounds terrific but not compared with the $19,300 you'd have if you'd invested the same amount of money in an index fund that charges 0.25%. What's more, since active funds tend to buy and sell stocks far more frequently than index funds, they usually pass along far higher costs by way of commissions and tax bills.

To put it another way, you'd be paying over $2,000 over the quarter century, or two-thirds of your initial investment, just for the privilege of having your money managed by someone else. That's compared with $570 for an index fund. And that doesn't even factor in the extra profits you would have made in the index funds by investing the money not gobbled up in fees.

The mangers simply don't earn their fees, they deliver no value. So, if management is worthless, why should you pay for it? Well, you don't have too. Two alternatives exist index funds sold by mutual fund companies, and the second is exchange traded funds which are traded on stock exchanges.


An index fund simply track a stock market index, which is a collection of stocks. There are many different indexes that cover all regions of the world, and different industries. For example, the S&P 500 is a stock market index that tracks the 500 large public companies that trade on American exchanges. There are other indexes that cover specific countries like India and China, or industries like energy, and gold mines. Some mutual fund companies sell index funds, and their fees are much lower than the manged funds. For example Vanguard, has an S&P 500 fund that charges just 0.17% in fees. That can be the difference between making money or losing it.

Another alternative, is to buy Exchange Traded Funds, or ETF for short. ETFs are like index funds, but you don't buy them from a mutual fund company. Instead, you buy and sell them just as you would the stock in any company. The advantage of ETFs over index funds is that you don't have to pay a load-fee, which is just a commission, and can be 5% or even higher, instead you would pay a flat commission that would be from 0-$20. And the fees for ETFs are often even lower than index funds. For example the ETF equivilent to the Vanguard S&P 500 fund would be they SPDR S&P 500 which had fees of 0.0945% last year. The downside of ETFs is that you need an online brokerage account, which is a step that some simply aren't willing to take. You'll also have to take responsibility for understanding what you buy yourself. But, with a self directed retirement savings account you can take full advantage of tax savings and use your online brokerage account. Just as banks are willing to screw you over with mutual fund fees, they are also willing to help you say 'no' to high fees and no value by setting up a discount brokerage account for you. Because, it's all about the money, and if they cant' rip you off with mutual funds doesn't mean they want to lose you as a customer.

So, don't pay expensive fees and get nothing in return. Look into low cost index funds, or even ETFs if you feel you are ready to take the plunge.