In the past few months, the financial media has covered New York Attorney General Eliot Spitzer's investigations into several mutual fund companies. Bank of America (NYSE:BAC), Janus (NYSE:JNS), Bank One (NYSE:ONE), and the privately held Strong Financial Corp. were all named in connection to alleged illegal trading practices. And now, according to The Wall Street Journal, Spitzer is looking into some 15 investment banks, as he expands his investigation of mutual funds and their wheelings and dealings.
We at the Fool have also reported on these developing scandals. In fact, we've been warning investors for many years about various problems inherent in mutual fund investing. We've railed against such problems as their outlandish fees, overdiversification, below-average performance, and counter-productive, short-term thinking.
So, you might think that all these issues highlighted in the press might cause many investors to think twice before investing in mutual funds, or even push them to yank their money out. You'd be wrong. As a recent Washington Postarticle details, the mutual fund industry is continuing to grow.
According to Lipper Inc., the four fund families listed above had net outflows of $8 billion in September, the month the scandal broke. But according to fund researchers Strategic Insight, $85 billion was added to stock funds in general in this year's third quarter, with about $25 billion added in September.
Why haven't more investors steered clear? The likely answer is ignorance. Too many remain unaware of conflicts of interest prevalent in most managed mutual funds, such as when funds advertise to draw more investors, even though the more money they have to manage the harder it generally is to do well. (And to make matters worse, they charge their shareholders "12b-1" fees, to cover such marketing costs.)
To counter these problems, we Fools heartily recommend index funds, which are mutual funds that require no handsomely paid professionals guessing which stocks to hold for how long. Index funds simply contain whatever their stocks their corresponding indexes contain -- in the same proportion. Market-based index funds aim to roughly match the market's performance. Learn more about index funds. If you'd like to learn about some of the relatively few funds that do outperform the market average, review this list.
