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What’s the deal with mutual fund investors’ owner’s regret?

I will leave it to a reader to illustrate this point. “Are mutual funds bad?” she recently asked. “I hear a lot about how index funds are better; the fees associated with mutual funds are too high; and you don’t really need a financial adviser unless your financial life is complex. I have all my investments in mutual funds – is that the wrong choice?”

There’s about $2-trillion sitting in mutual funds in Canada, which is to say they’re a popular and foundational way to invest. But not a lot of people have a good word to say about mutual funds these days. What we tend to hear about funds is how their fees are high and they too often underperform benchmark stock and bond indexes that you can buy into with minimal fees using exchange-traded funds.

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The reader questioning her investment in mutual funds has picked up on these messages and worries she’s made the wrong choice. Let’s settle this quickly. In using mutual funds as an investing vehicle, she has made a perfectly valid choice. There are many good to excellent mutual funds that will get you where you want to go financially if you stick with them.

There’s a second layer to this reader’s question – the funds she actually owns. Funds as a concept are fine, but many individual funds have fees that don’t justify the results and should be dumped. It’s up to her, along with her adviser, to compare the results she’s had in both the near and long term to see if she’s getting value.

Value could mean returns that match or beat low-cost ETFs tracking benchmark stock and bond indexes, or it could mean competitive returns that sacrifice a little upside in bull markets for better protection when stocks plunge. There’s also value in the convenience of funds – easy reinvestment of dividends, no cost to buy or sell in most cases, and low minimum requirements for adding money to an account.

There may also be value in the advice and planning done by an adviser who sells mutual funds. A big chunk of those hefty mutual-fund fees goes directly to advisers and their firms to cover the cost of client service. Even investors of modest means can benefit from help with saving for both their retirement and their children’s postsecondary education.

ETFs are the opposite of mutual funds these days in that their image with investors is nearly spotless. But this is just as much an inaccurate generalization as the negative sentiment about mutual funds. There’s a gimmickry to a lot of ETFs coming to market today – they’re based on soap-bubble investing trends seemingly selected by marketing teams. Other new products are in core asset classes, but offering no discernible benefit over established competitors. They’re just clutter.

If all the investors who owned mutual funds took a close look at the value they’re getting, we’d see a lot less money invested in mutual funds. But funds are not an automatically bad choice as a broad investment category – just as ETFs aren’t necessarily all good.

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