What You Should Know!
One of the big advantages of mutual funds is that they allow the small investor to have professional management and diversification for a small fee. The problem that we face nowadays is that the fund industry has grown and proliferated by merchandising to all and sundry. Most people who have sufficient capital would be much better off with a professionally managed personal account. When an individual has a thousand dollars or less, it is difficult to think of a better place to invest his or her money, than in a mutual fund. However, when a person has several thousand dollars and considers a mutual fund,
These are the disadvantages:
- In the past, most fund management companies had one person in charge of managing each fund. With so many funds in existence today, it is difficult to find the kind of talent this job calls for. Some management companies are doubling up and have one manager for two funds. Naturally, such a large task is difficult.
- There are more mutual funds today than there are securities on the New York Stock Exchange. This makes selection more difficult.
- Sometimes a mutual fund is so large, that it might be priced out of some purchases. Management can only watch so many securities and this means that a large fund may not be able to invest in a company, simply because that company has a small capitalization. A small company has more growth potential.
- The fund manager is managing for thousands of people and these people might have differing thoughts on areas of investment. The personal money manager is handling each account for one individual and the investments are scaled to comply with this client’s wishes.
- In reality, a mutual fund investor is purchasing proportionately every stock in the fund’s portfolio. The investor may buy a fund today, only to find that management has sold one or more of the stocks at a profit. Although the manager may have done a good job, this does not work to the new investor’s advantage. He may have purchased the fund when U.S. Surgical was selling at 140, only to find that it was sold when the stock started downhill and got out at 120. This investor has actually taken a loss, but the firm may have bought it years ago at 20, showing a 100 point profit. The new investor must pay taxes on a profit even though he has taken a loss.
In reviewing the portfolios of our clients, we find that approximately 1/3 of their holdings were concentrated in 20 stocks. These are the companies that we consider to have the best outlook over the coming period. Compare that with the situation of a mutual fund holder. His money is spread over 100 or 200 stocks. I would not expect the last 20 stocks in the fund to perform as well as the first 20. With an individualized management account, the management fee is deducted and the amount made plain to the investor. In this manner, he may apply this cost against his income tax. In mutual funds, this is not done. The fee is deducted, but the investor never knows the dollar amount.
DISCLAIMER:
Information has been obtained from sources deemed to be reliable. Pearson Capital, Inc. makes no guarantee as to the accuracy or completeness of this data. Information is provided for informational purposes only, and Pearson Capital, Inc. shall not be liable for any errors or omissions, or for any actions taken in reliance thereon.
