3 Things You Didn't Know about Mutual Funds

Learning about mutual fund investment can provide you with a valuable tool to use in the marketplace. Mutual funds represent one of the most commonly traded securities in the world. However, the average mutual fund investor does not understand everything about mutual funds. Here are a few things that you may not have known about mutual funds.

1. 12b-1 Fees

12b-1 fees are charged by many different mutual funds as part of their expense ratio. While investors are used to paying fees for everything, this one can be particularly frustrating. This fee is associated with marketing and advertising for the fund itself. Therefore, as a mutual fund investor, you are actually subsidizing the cost to bring on more investors to the fund. Unfortunately, it is very easy for a mutual fund to get too big for its own good. Therefore, the more investors that are added to the fund, the lower the returns are, traditionally.

2. Late Trading Scandal

One incident that gave the mutual fund industry a black eye was the late trading scandal that took place. Late trading is illegal and is the act of allowing customers to purchase mutual funds after everyone else. Mutual funds are bought and sold at the net asset value of the fund at the end of the trading day. Therefore, whenever you put your order in for a mutual fund, it will be processed at the end of the day, at the same time as everyone else. However, when you are allowed to late trade until after the market closes to place your order, this can give you a significant advantage. By looking at other markets like the futures market or Forex market, you can get an indication as to where the mutual fund value will open at the next day. This allows you to lock in profits illegally. Many institutional investors were utilizing the strategy before they were caught. As an individual investor, this is something that you always have to be cautious of.

3. Expense Ratio Importance

Something else that many investors do not realize is the importance of the expense ratio of a mutual fund. The expense ratio is the cost that is associated with maintaining a mutual fund. This includes the fees that the fund managers earn, as well as administration costs. This also includes the 12b-1 fees that were mentioned earlier in some cases. When shopping for a fund, you should look at this number first. The higher the fees that the company charges, the less you will make in return each year.

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