Today it is more complicated than ever for the average investor to really understand how to pick a mutual fund. Most novices may choose a fund if it has a 4-star or 5-star ranking. Or they decide to pick a fund because they did a Google search for best returns and then select one from the top of list. The truth is, most investors today would be lucky if they could name one or two actual positions that their mutual fund owns if they were asked. In my opinion fund companies could become more friendly if they used the Keep It Simple Stupid principle.

  1. First, mutual fund companies should provide consumers some sort of simple x-ray software so when they choose to buy multiple funds from a fund company, an investor can at least have some idea about how much the different funds overlap. Far too often, I see consumers who own three or four different mutual funds only to explain to them how many of the holdings from the funds are the same.
  2. Second, no more asterisks. I detest the asterisks. I know, fund companies will say that this is just part of the regulatory process, but when you have footnotes that start reaching 10 or more at the bottom of an ad it’s likely you haven’t made it easy for consumers. Unfortunately most investors won’t ever read them to get the real scoop about the funds.
  3. Last, make everything transparent. The easier it is for an investor to be able to compare apples to apples, the better the experience will be. Fund companies often use obscure benchmarks consumers won’t understand or state returns in a fashion that is difficult for a consumer to see exactly what they would have netted from investing in the fund.

Written by: Ted Jenkin
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