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Sound Advice: July 29, 2020

Fund Facts

Navigating the world of mutual funds can be an interesting adventure.  Indeed, for other than professionals (and probably for some of them), working one’s way through this forest of some 8,000 funds may be overwhelming.  Even so, here is some assistance in understanding.

Mutual funds have been around for decades.  They become popular in the 1970s and 1980s.  Fifty years ago, most funds were load funds.  Load is another word for sales charge.  Back then, it was not uncommon for load funds to have initial charges of 8% or so when making investments.  So on Day One, your $100,000 investment was worth only $92,000.

As time passed, investors became increasingly concerned about these sales charges.  Then several things happened.  The mutual fund companies created different classes of shares.  Typically, Class A included the stated load when the initial investment was made.  For investors who balked at that, they created Class B, which had no charge up front.  The hitch was that the charge was applied when shares were sold.  

Some folks were uncomfortable with either of these charges, which led to Class C.  Class C came with no front- or back-end charges.  It did, however, come with an annual fee.

All of these fees were in addition to the ongoing administrative and management fees, which were usually in the range of 1% to 2% per year.  These fees in aggregate were increasingly resisted and the universe of no-load (no sales charge) funds emerged.  Today, no-load funds are dominant.

In addition to the matter of fees, it’s important to be wary of duplication of underlying holdings. That’s especially true when considering the largest funds.  Why? Because as assets under management increase, fund managers have to focus on stocks that are actively traded, i.e., highly liquid.  They must buy huge positions.  For that reason, as the fund’s assets increase, the range of investment choices decreases.  It should come as no surprise, therefore, that there is considerable duplication of underlying holdings among the biggest funds.

Accordingly, it’s a good idea to avoid huge funds and concentrate on mid-sized funds.  Smaller funds may also be of interest, though one would be well advised to limit consideration to those with $100 million or more under management so that the fund’s expense ratio is within a reasonable range.

Pay attention also to the tenure of the fund’s manager.  Often, investors are tempted to concentrate on funds that have had the best returns in recent years.  This may not a wise approach.  What is wise is noting the tenure of the current fund manager.  If the manager has been aboard for an extended period, the fund’s record is that manager’s record.  But if it’s a new manager, it is essentially a new fund.

The task of sifting through the pile of fund information may be challenging, but these guidelines should help avoid mistakes that might otherwise be problematical.


N. Russell Wayne, CFP

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