Mutual Funds Have Hidden Fees. If fees were hidden, those hidden fees would certainly be on the list of disadvantages of mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees. While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the mutual fund prospectus and can be found on the mutual funds’ websites. Many mutual funds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual fund that does not charge the fee. Hidden fees cannot make the list of disadvantages of mutual funds because they are not hidden and there are thousands of mutual funds that do not charge 12b-1 fees.
Mutual funds give investors the ability to diversify across a wide variety of investments that they otherwise may not carry in their portfolio as individual securities. Since mutual funds invest in a diverse range of securities and investment options, one mutual fund share actually represents proportionate ownership in each and every investment in the mutual fund’s portfolio. Of most interest to investors is that each share also proportionately represents the profits of those investments as mutual funds are required to pass along profits to their investors by way of mutual fund distributions, which come in several forms.
Balanced Funds: Also called hybrid funds or asset allocation funds, these are mutual funds that invest in a balanced asset allocation of stocks, bonds, and cash. The allocation usually remains fixed and invests according to a stated investment objective or style. For example, Fidelity Balanced Fund (FBALX) has an approximate asset allocation of 65% stocks and 35% bonds. It considered a medium risk or what industry experts might call a moderate portfolio. Vanguard also has an outstanding index balanced fund, Vanguard Balanced Index (VBINX), which is suitable for investors looking for moderate risk. Balanced funds can be ideal for beginning investors because they are well-diversified and can, therefore, be used as stand-alone investments or as core holdings to begin a larger portfolio.
The mutual fund then passes along the profits (and losses) of those investments to its shareholders. So if a mutual fund does well, you benefit. But, they’re not risk-free. Read on to learn more about how mutual funds work.
Saving for Your Initial Mutual Fund Purchase. Most mutual funds have what’s called a minimum initial purchase, which is the amount you’ll need to have saved prior to buying shares of your first fund. Most mutual fund companies have minimum initial purchase amounts of at least $1,000. For example, most of Vanguard’s mutual funds have a minimum initial purchase requirement of $3,000. Fidelity funds are typically at $2,500. However, once you make your first purchase, subsequent purchases of the same fund are usually as low as $100.