Mutual Fund Mania

Canadians love their mutual funds. Perhaps it's because we're pretty unsophisticated investors and fairly risk adverse? Regardless, there are more than enough funds to appeal to all types of investors, from conservative to aggressive. There are even funds of funds to further diversify your risk.

Let's look at some of what we feel at HHV are the benefits to investing using mutual funds:

1. cheap access to diversification
2. cheap access to equities, many funds have $25 minimum investments
3. very liquid, in some cases 24 hours to get your money back
4. RRSP eligible (unlike a second or third house)
5. professional management, sometimes even relatively cheap
6. dollar cost averaging
7. sometimes less volatile than individual stocks
   

How about the draw backs:

1. Canadian mutual funds rate poorly on expense related to management (MERs) compared to their international peers
2. the sales game, many mutual fund (financial) advisors try to sell you funds of funds, which usually end up costing you more and making you less
3. capital gains tax paid from within the fund year-to-year AND when you sell your shares outside a registered plan
4. crazy commission structures that can be punishing at times and hard to understand
   

Again, I'm NOT A FINANCIAL ADVISOR and this post is not advice. Rather it's just an airing out of my thoughts on an investment product. I own mutual funds. I don't trade them though. They're a five-plus year investment for me (with an almost immediate payback as dividends usually get reinvested). My favourite family of funds right now come from Front Street Capital and have done me pretty good over the past couple of years.

I'm a value investor before anything else. What this means is I look for good deals. I like the price to sales ratio the best (not to be confused with price to earnings). There is a great performing fund family from investment guru James O'Shaughnessy sold through RBC securities. This is where I learned the price to sales ratio. James suggests that companies that you can buy $1 of their sales for less than $1 of your money, and that are over $250 Million in market cap, chances are pretty good you'll beat the market. His funds almost always beat the market. And he charges well below the average MER to do that.

For all the benefits of mutual funds, I strongly believe that when you get over the $10,000 net assets invested mark you are better off investing directly into companies (10 plus). You have to pay more attention to your investments, but isn't that part of the fun? Since I've been doing this (paying attention), I've not only learned more, but had more fun saving and investing than in reading mandatory mutual fund prospectus statements.

I'm not sure if this will spark the kind of discussion we enjoyed earlier today, but we'd like to hear your thoughts on mutual funds. Are you in or are you out?