Michael Morrow: Mutual funds
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Transcript of Michael Morrow: Mutual funds
Liquidity
When it comes to liquidity, mutual fundsusually get a good rating. If you want to access the money in the fund,you can do so without any penalties or extrataxes. However, the degree of liquidity depends onthe type of funds you own. There are three different classes of mutualfunds, and each class has different feesassociated with it.
Safety
If mutual funds received a rating for safety, therating would not be very high. The success and failure of mutual fundsdepend on the performance of the market.When the market is up, so is the mutual fund.But when the market is down, so is the mutualfund.If safety is your biggest concern when it comesto your assets, then you should seriouslyconsider how comfortable you are facing therisks of the market.
Expenses
With mutual funds, there are two fees thatimmediately stand out: the fund managementfee, or administrative fee, and the feeassociated with using a financial advisor.Management fees can vary from low to high.However, Morningstar reports that the averagemanagement fee for a mutual fund is 1.25%. A1.25% management fee is actually similar tothe management fees of other assets outthere. Many people need the assistance of a financialadvisor to help them manage the fund, andthat adds another 1 or 2 percent to theexpenses.
Rate Of Return
Since mutual funds are tied to the market,their rate of return can vary significantly. Mutual funds have the potential to grow overtime, but many investors fall prey to theiremotions. They either get worried and sell toosoon or chase top rated mutual funds with thehope of making more money.The typical bond investor has only averaged a0.59% return over the last 30 years.
Tax Efficiency
Since you’re taxed when the fund managersells individual assets, you can end up paying alot of taxes on a mutual fund. Each year you’ll receive a 1099 form for thefund. If any assets were sold in less than a year,they’ll be considered ordinary income, andyou’ll have to pay the expensive taxesassociated with that. On the other hand, assets held for more than ayear will be taxed as capital gains. If you use amutual fund manager like the majority ofpeople, you have no control over when themanager buys or sells assets. One strategy to avoid excessive taxes is toinvest in an index fund that has low turnoverrates rather than an actively managed fund.