I am frequently asked about my opinion on the value of mutual funds. Since the early 1980s their popularity has grown exponentially where many investors feel they are simply the only option available. However, in general they have many disadvantages that are rarely discussed frequently:

Taxes: Taxes for mutual funds are arcane, to say the least. Be careful buying a mutual fund in a taxable account late summer through October until after you declare capital gains. For example, you may purchase a fund in a taxable account in June, but you should understand that you will be responsible for the taxes generated by the fund for the entire year up to and including the date of purchase. If the fund’s value declines, keep in mind that you may still be liable for capital gains taxes despite your loss.

Lack of a defensive strategy: Equity funds are primarily based on a “buy and hold” strategy that is most effective when the stock market is in a secular bull market. This has not been the case since 1999. Since most funds remain fully invested at all times, the prospect of profit in a turbulent environment is difficult unless the investor has a strategy for selling the fund when risk is high. high.

Lack of inputs: This issue is a major concern for green and socially responsible investors. Many SRI funds assess up to 15 social issues and will include a stock in their portfolio if it is deemed “best of all.” which at the time was considered the best of the integrated oil companies.

Relatively few star performers: Most equity funds don’t outperform their corresponding benchmarks, so indexing has a place for many investors. As funds grow in size, their performance tends to dilute as assets grow.

Specialty Mutual Funds: Bond funds, especially funds related to high-yield, inflation-indexed, and convertible bonds, are often very expensive or difficult to purchase individually on the open market. So using a mutual fund for this asset allocation tends to make a lot of sense.

Closed-End Funds: These are mutual funds whose shares are traded on the open market. During a period of great market stress, when sellers sell just for the sake of it, the value of many funds will fall below their net asset value. Buying closed-end funds that sell below NAV is often a very profitable and effective strategy as long as the underlying assets of the fund do not continue to fall below the purchase price.

In short, while it’s hard to paint all mutual funds with the same brush, many funds are worth your market share and desire to own. However, our view is that the mass marketing by the mutual fund industry often reinforces the belief that mutual funds are the only and primary answer for investors, which is not the case.