When are mutual funds considered a bad investment?

Mutual Funds
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January 2017
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When they go down. In all seriousness, a mutual fund is a tool just like other investment vehicles.  And the mutual fund is really a receptacle, technically a type of entity, to hold the investments within the fund. It really isn't a question of being good or bad, but rather does it suit your needs. The investments within a mutual fund can range from conventional stocks and bonds, to commodities and even currencies. A few even specialize in short selling and/or use leverage. So depending on what you are trying to do, they could be a valuable tool to achieve your goals. But if used incorrectly, they could do much harm.  

I am assuming though, based upon your question, you are referring to more conventional stock or bond mutual funds. Those "vanilla" funds are a good way to get exposure to stock or bonds and diversification at the same time.

One thing you might want to research are Exchange Traded Funds, or ETFs. These are the "new" generation of mutual funds that can do everything stated above. Unlike the conventional mutual fund, it can be sold during the day like a stock. This is in contrast to a mutual fund where you have to wait until the end of the day closing price known as the NAV, or Net Asset Value. The SPDR S&P 500, ticker symbol SPY, was the first ETF created in the mid 90s and mimics the S&P 500. Similarly, the PowerShares QQQ NASDAQ 100, ticker QQQ, invest in the largest 100 companies on the NASDAQ like Microsoft, Apple, Amazon, Google, Intel, and many large cap bio-techs. These two ETFs in combination could provide broader exposure to the two major broad indices efficiently. And there are many others including sector specific ETFs. Vanguard has many very low cost ETFs including Total Market, stocks or bond, ETFs.

Mutual funds can do this exact same thing, but you just don't have the added benefit of selling during the day, which in most cases, won't be an issue. I just prefer to have as much flexibility as possible, so why not have the added perk without a downside.

This should be plenty of information to get you started on your research journey.  Best of luck, Dan Stewart CFA®

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