How to Police Your Fund

Is your mutual fund ripping you off?

Allegations of fund dirty dealing are spreading. Each day fund investors are bombarded with news of new schemes to skim profits from longer-term, smaller investors. What's a person to do?

The parade of articles and TV segments may lead investors to the wrong decision: that the fund industry is a big con game run by crooks and insiders and that you should bail out immediately. But there are more proactive steps available for investors who want to avoid questionable funds.

As any TV detective drama fan knows, for a crime to take place, there has to be a motive. What are the motives and clues in mutual fund dealings? Call it mutual fund profiling. In a court of law you need to prove beyond a reasonable doubt that a crime was committed, but as an investor you may simply want to avoid a fund that smells fishy. You are allowed to discriminate when investing.

The increased regulatory and public scrutiny will surely cool down bad behavior at funds in the same way a crime ring has to lie low after a police crackdown, but here are some good clues to whether you might want to question your fund:

Rule 1: Avoid Load Funds

The motive for all fund companies is simple: make more money. However, for most no-load fund families, making more money is best achieved by having the best-performing funds. Past performance (unfortunately) sells itself, and a fund that beats competitors brings in far more money than any short con will generate.

Because of this fact it is not likely that a typical no-load fund family would do anything intentionally that would significantly compromise fund returns. Most no-load funds simply don't have the motive to ruin fund performance.