Mutual Funds and Investment

It’s not return on my money that I’m interested in, it’s return of my money.

Mark Twain, 1835-1910

The arrival of the first mutual fund into the marketplace in March of 1924 revolutionised the way we invest money in the stock market, although mutual funds became prolific only years later, when adopted by institutions in the “go-go” era in the 1960s.

A mutual fund is a company that pools money from many different investors and then purchases tradable securities such as bonds, stocks, short-term debt and other investments. The combined holdings of the fund company are known as the “portfolio”. The company also appoints a manager and administrator to manage and administer the portfolio for a fee, in accordance with the mandate and conditions laid out in the fund prospectus.

Low entry levels for new investors, some diversification of investment risk and ease with which investors can subscribe and redeem shares are among the reasons why mutual funds are so popular.

Mutual funds may be actively managed, or may passively track a stock market index.

Whether you are a company director sitting around the boardroom, or a family sitting comfortably in your living room, mutual funds allow millions of diverse people, at the stroke of a pen, to commit money into the world’s stock markets. Individuals, families and companies commit billions into mutual funds through their investments, life assurance pensions and savings products. Many ignorant of the machinations of domestic, let alone global, stock markets, willingly throw themselves to the mercy of a salesperson employed by the mutual fund provider or distributor.

If you have a private pension plan, life assurance endowment with a mortgage, savings or investment plan, chances are that you will own, or you already own, shares in mutual funds

Mutual fund costs need to be high to pay incentives in the form of commissions to a network of agents and intermediaries, to ensure their widest distribution. Competition is fierce between banks, life assurance companies and asset managers, who design and manage products to maximise returns for the producer, not the investor.

Sadly, most active managers will fail to achieve the market rate of return, often proving Mark Twain’s point. Costs can be much higher when mutual funds are included within a life assurance wrapper to mitigate tax or to diversify market access. Do consult your tax advisor before making a commitment, as mutual fund products are generic and may not be right for you. Make sure the shoe fits. Understand your own investment objectives. Your salesperson may be qualified and licensed to sell products, but is unlikely to be qualified to give independent tax advice.

When buying mutual funds and making a long term financial commitment, you may not have sufficient knowledge to challenge a salesperson or advisor, but you can certainly protect yourself to a large extent, by demanding to read the prospectus and making cost comparisons.

A small proportion of mutual fund assets do enjoy the attention of companies that place investor interests first. Sensible investors will seek out these companies, albeit a minority.

The overwhelming assets in mutual funds are in the hands of managers who trample investors’ interests, as they seek to generate more profit for the company that employs them. Caveat Emptor.

Jeremy Blatch TEP
Society of Trust and Estate Practitioners Logo

This article was also published in the print edition of the Sur in English