Tag Archives: Mutual Funds

Are Mutual Funds a Good Investment?

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I think this is a very important question to ask yourself because many people out there get manipulated strung along when it comes to investing. The fact is that most of us simply don’t have the time to learn how to invest properly. We are busy. I think there is a very fair argument that you’re probably better of making the money to invest, rather than worrying about where you’re going to invest it. But for me you need to face facts. No one is going to look after your money as well as you are. You earned it and you don’t want to see it wasted.

There is so much misinformation out there that it is confusing. Are mutual funds a good investment? If you went to a bank and spoke with a financial adviser you’d probably think so. I think before you ever speak with an adviser, you need to educate yourself first. I’m not saying you need to know everything, but you need to know enough. You don’t want to be taken advantage of.

Financial advisers at banks are pretty useless. The reason why I don’t like them is that they really don’t know anything. They’re not experts per say. They’re more salesman. They sell the mutual funds of the bank promising you big returns. In fact, they’ll dig out pretty looking charts and show you how well it has been working in the past. I have to admit that these charts look great, but I’ve yet to find one that actually performs like that. What is often missed out is the higher MER or management cost. It’s a cost to you, but it’s hidden in the fund. A lot of mutual funds run at 2%.

Most actively managed mutual funds won’t beat the market. The point of this site is to show you another way of doing things and that is buying passive index funds. The MER or management cost is a fraction of a precent. You come up with an asset allocation that you’d like and just buy. There’s no real thinking beyond that. Passive index funds are designed to follow the market and as you know the market produces pretty good returns over the long run.

Let’s take a look at a very popular passive index fund like TD e-series and compare it against my work’s mutual funds from Manulife.

Canadian Equities

Here is a look at Canadian equities between both the passive fund (TD Canadian Index-e) and the active mutual fund (Manulife Canadian Equities). You can click the image to get a closer look, but the red is the passive and the blue is the active mutual fund. Over a period of roughly 5 years, the passive fund outperformed the mutual fund by 12%. That’s a lot of money. And the reason it out performed is that it didn’t charge high fees hidden in the fund as MER and it didn’t try to guess which stocks would be winners. Really can anyone predict the funds that will be the winners?

Canadian Bonds

Unfortunately TD e-series bond fund is much different than the the Manulife Canadian Bond Fund, it wasn’t fair to compare them both. The passive fund held mainly Canadian bond/provincial bonds, whereas the Manulife one held a lot more corporate bonds. But as you can see in the graph above, the Manulife one under performs its appropriate index. There are other passive funds out there that follow this index and will out perform this mutual fund. Over the last 4 years (since this fund isn’t that old) it has unperformed the market by around 6%. That’s 6% of your money lost and paying the bank or Manulife in this case.

Are mutual funds a good investment? No they’re not. You’re better off investing in passive index funds. It’s cheaper, it’s easier and you’ll make more money over the long run.

Active Managed Fund Advertising – Watch Out

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It is pretty tough to be a Canadian passive investor because you don’t have many options available to you and the active mutual fund industry is massive. The amount of advertising that goes around is amazing and sometimes you don’t realize it until you look into it. I recently took on a new job at a company that has an RRSP matching program with Manulife. You open up the book on investment options and you see all these amazing returns. The MER (Management Expense Ratio) is pushing 2%, but with those returns you would think it was worth it.

It’s all objective data, but you can choose how to present and really make any fund look profitable. I was in a discussion with someone about this very thing and he was comparing his fund against the S&P/TSX index. The fund had a 1.24% MER and here is the graph he shared with me.

I hid the fund name, just to be safe against any sort of “legal” type of attack. Looking at that graph you think that this fund is amazing. It did a really good job and definitely outperformed the TSX Composite Index. In fact, the last few years it seems like it greatly outperformed the market and this must be a good fund.

This is the type of advertising I’m talking about. It’s not a true representation of facts. If there was an industry standard for presenting this information you would be able to see the differences.

The big thing for me is what they’re actually trying to present. From what I can tell, this isn’t real returns, but if you invested at the start of the graph, this is where you’d end up compared to the TSX. In fact, the last three years the TSX outperfomed this fund for the most part, yet you don’t see it on the graph. You can click here to see the last three years.

Also something that isn’t reflected in the graph is the MER of the fund. The fund would have to beat the S&P/TSX by more than 1.24% each year to actually make a gain.

Despite the fact that the last three years (which is as far back as I can go with Google Finance) shows the TSX beating it out, there is something that many people don’t think about and typically the people against passive investing (and love mutual funds) miss; is it right to compare the S&P/TSX Composite Index with this fund?

The answer to this question is no. This fund actually holds onto a higher number of financials and lower numbers of energy, utilities, materials when compared to the TSX. It’s just not a real comparison.

What I’m trying to say is that you need to watch out for the mutual fund advertising trying to show you how much money you can make if you just pay an extra fees for their superior product. The likelihood of it being superior is just about nil. You’ll find that if you investigate into what an active managed fund is trying to tell you, you’ll see that the picture isn’t as rosy as it seems.