Are Mutual Funds Right for You?

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Published by Ryan Cooley

Most of us have heard at one point or another that mutual funds are an easy way to invest when desiring instant diversification. While this may be true, I have listed a few things you should consider when determining if mutual funds are right for you.

Most of us have heard at one point or another that mutual funds are an easy way to invest when desiring instant diversification. While this may be true, I have listed a few things you should consider when determining if mutual funds are right for you.

High Fees:

When researching which mutual funds to invest in, it is important to know they all carry their own fees. Some can be as high as 2% or more. Additionally, if your advisor charges an advising fee and uses mutual funds, this can cause your cost of investing to increase. Ultimately, these costs will impact your actual ROR. Thus, if your investments grew 9% last year, you may actually be looking at a much lower return.  After paying your advisor and the expenses and fees of the mutual fund, you could end up earning only 6% or less. That is why we show our clients their net return accounting for all fees and expenses.  Unfortunately, this level of transparency is not always present amongst advisors.

Tax Consequences:

There are also tax consequences that may cause mutual funds to be inappropriate for your specific financial situation. This is something to be conscious of if your mutual funds are not part of a retirement account (qualified accounts, IRA’s, 401k’s, Roth’s, etc). In the case of mutual funds, capital gains are passed on to each shareholder, regardless of how long you have had them. On the other hand, if you own individual securities, you have more control over the type of capital gain and when you take it.

Short-term capital gains are a great deal higher than long-term capital gains. You should examine if short-term capital gains are a possibility before buying into a mutual fund. For more information on what to consider in retirement, download our free resource 8 Blunders to Avoid in Retirement.

Often, we also see capital gains occur when funds need to raise cash.  As investors sell their shares, the fund requires cash to pay them. This means you could end up paying capital gains even while the mutual fund loses value. Not only is it tough to lose on an investment, it makes it even worse if you have to pay taxes, as well.

If you are wondering if mutual funds are right for you and your portfolio, take our Risk Tolerance Questionnaire. We can then schedule time for a complimentary consultation and analyze what investment options work best for your financial goals.

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