Are Mutual Funds an efficient and effective method of long term investing?
Efficiency of Mutual Fund Investing
Mutual funds offer an efficient method of investing in the sense that it will offer a more diversified strategy of long term investing.
It seems that average compounded rates of return are higher the longer the investor horizon. The investor needs to carefully understand market volatility though, don't be afraid of downturns, don't shy away from making adjustments based on your risk tolerance, always seek advise of a financial professional...Their knowledge of the industry and fund returns are very important!
In my 20 years of practice, I have personally seen many investors who have accumulated wealth in the stock market are those that have made regular and consistent investment in same amounts over long periods of time..
Mutual Fund Commission and Other Costs
As far as funds themselves are concerned, it is important to note that there are 3 classes of funds, and costs of the funds are either back-end loaded, or front end loaded! Class A has commission costs of 5-5.75%, with no surrender charges, Class B has 0% Commission Charge whereas it has cash surrender value of for up 6 years! Class C has 1% annual commission costs, but no cash surrender charges.
Mutual funds have marketing expenses, and management fees as well. Clearly, Class A funds have least management fees whereas Class B and Class C have the highest. If one intends to invest over 7 years it seems mathematically, that Class A would yield a higher rate of return than Class B or C.
Mutual fund salesman generally would be indifferent to what you fund class you choose, as the industry is very highly regulated, and nowadays, it is unlikely the investor is going to be doped anymore!
Tax Aspects of Mutual Funds:
If you invest in mutual funds avoid making significant investments in the months of November and December. Most of the mutual fund transactions take place around the tax year end, and so capital gains or redemptions take place around that time and investors generally who invest in the 4th quarter will experience a capital gain, of short term character and hence experience a higher tax rate!
Cost Basis Information
Mutual funds generally will keep track of the cost basis information. When dividends or capital gains are reinvested, the mutual funds generally will keep track of these reinvestments and will add to existing cost basis. This is very useful and efficient for the taxpayer for year-end record keeping or whenever he sells the funds.
Mutual fund investing is not the only financial strategy one should employ in their financial planning strategy, but it is a useful and important strategy. I also advise my clients to consult a financial planner who will devise a financial goal and strategy to map out a long term investment plan!
Last edited by TaxGuru : 12-26-2007 at 11:16 AM.