Busting the Mutual Fund Myth

The answer in many people's minds to this cost/benefit predicament is to invest in index funds and exchange-traded funds. By design, these funds will underperform the benchmark target because of their cost, nevertheless those costs are minimal and the underperformance is negligible.

While we are not quite done with the Mutual Fund Myth (there is more to come at a later date), we have now dispelled (or busted) some of the most widespread myths associated with mutual funds. Understanding how to navigate these myths will make you a much better investor.

Key Points:

• Don't assume that just because a fund is big, your costs will be less than a smaller fund.
• Don't be ensnared by the trappings of diversification. A fund's objectives, risk metrics and portfolio weightings can make or break your portfolio.
• While you're often warned that past performance is not indicative of future returns, there is still a reason for a fund's past performance. Comparison shopping and homework are required.
• Index funds or ETFs can offer competitive alternatives to large mutual funds.

Some Homework:

• Before you invest in a mutual fund (regardless of its size), check the fund's cost structure.
• Analyze each fund's objectives, risk metrics and portfolio weightings. To review this data, go to publicly available sources, such as the fund sponsor, Yahoo! Finance, Bloomberg or Morningstar.
• Compare the performance rates of a wide-range of funds (and understand what really drives those rates).
• Consider shifting assets out of large-sized mutual funds into index funds or ETFs.

You can email me your homework and your thoughts on the subjects covered in this article. I will compile the best ideas in a future module of TheStreet.com University.

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