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Why you should not invest in Mutual funds?

 

Rather why NOT invest in hedge funds which are better than mutual funds anyways? You will have to read the first question before moving to the second which contains the answer. You can also read the entire interview(3parts) below.

 

An old article on TMF between Rich Smith and John Mauldin(www.2000wave.com.)

Rich: Your letters often refer to a "$1 million net worth" requirement for individual investors to attend such-and-such conference or invest in certain fund. Can you briefly tell us what this requirement is, who sets it, and why you don't seem to entirely approve of it?

John: It's a requirement that originates with Congress, and it basically relates to hedge funds. The rules limit the number of investors in private funds to 99 investors worth $1,000,000 or more or 500 investors worth $5,000,000 or more, with a number of variations for certain types of funds, which can be very confusing to the individual. Take away the net worth requirement and the investor limits, and anyone could invest in a hedge fund, just like anyone can invest in stocks, options, real estate, commodities, and similar "risky" investments. I testified to Congress a few years ago that they should create a new class of regulated hedge fund so that smaller investors could invest on a level playing filed with the richer investor.

Congress also restricts the right of "registered investment advisors" to charge an "incentive fee" -- that's the 20%-of-the-profits take that you hear about all the hedge funds charging their clients. Basically, the rule is that you have to restrict your clients to persons with a net worth of $1.5 million before you're entitled to charge the incentive fee. Now, since hedge funds have to register, the minimum net worth is essentially $1.5 million.

Personally, I think the rule is profoundly unfair. It means the rich get the best deals. I mean, are hedge funds really more risky than stocks, commodities, futures, real estate, or other kinds of investments? And who is Congress to tell people with less than $1.5 million or $5 million, "No, you can't invest your own money in funds the rich get to use?" If Congress said that women and minorities couldn't invest in it, there'd be rioting in the streets. But for some reason, it seems Congress is happy to discriminate against "poor" people and only let the "rich" invest in hedge funds. It's insanity.

Rich: What is the rationale behind the rule?

John: Lobbyists from the mutual fund industry tell congressmen that hedge funds are too volatile and risky for the average person, who has to be protected. Congress doesn't know any better and so, like useful idiots, they pass the laws they're told to.

So the intentions are good, but the result is most profoundly unfair. If individuals could invest in hedge funds -- which outperform mutual funds with comparable investment styles by as much as 300 to 400 basis points by the way -- then mutual funds would get beaten hands down. Investors would flock to hedge funds in droves because they're simply doing a better job of earning people money, especially in down markets. Mutual funds would lose market share and that is why they oppose such changes in the rules.

http://www.fool.com/investing/value/2006/05/08/hedge-funds-for-everyone.aspx

http://www.fool.com/investing/value/2006/05/09/recession-in-2007.aspx

http://www.fool.com/investing/value/2006/05/10/go-global.aspx