Mutual funds are CRAP!

Historically, the returns of funds run by fund managers has been dismal. Just 6% of professionally managed funds have, over the past five years, outperformed funds that are pegged to the S&P 500. Thus, one would do better just buying the SPY ETF which tracks the S&P 500 index. Why do fund managers do such a poor job in managing our funds? There are certain reasons, mostly regulatory, that gives rise to dismal returns.

Firstly, funds cannot invest more than 5% of their assets in a particular stock. This causes too much diversification and investors cannot choose to invest a huge sum of their money in a particularly strong company that the mutual funds holds.

Secondly, fund managers can only invest in companies that are very liquid. This eliminates the possibility of investing in value-growth companies that have very low liquidity but an extremely promising future.

Thirdly, fund managers are impeded by regulations such as being unable to invest in companies with unions or companies that are deemed to be in a specific industry eg. oil or utilities, among others.

Thus, it is wise for private investors to rather invest themselves by buying ETFs or researching companies on their own and creating a portfolio of their own liking. This makes investing much more fun and personal.

Author: Sudhan P

I simplify investing concepts to help you navigate the stock market jungle.

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