Mutual Funds: The Good, the Bad, and the Ugly

Most physicians own mutual funds as part of their retirement plan. But how much do you really know about these investment vehicles? Let’s start with the basics—what’s a mutual fund? To put it simply, a mutual fund is an investment vehicle in which a group of investors pool their money to invest in a combination of assets that can include stocks, bonds, or other securities.

An advantage of investing in a mutual fund is that you can achieve a diversification of assets that you may not be able to achieve on your own. In other words, you can buy individual stocks, but buying as many stocks as are in a mutual fund is pricey and you would have to manage whether to hold those stocks or not.

According to NerdWallet, mutual funds can be divided into two categories: active and passive. Active mutual funds are managed by a professional fund manager who decides what securities to add or eliminate from the mutual fund. They apply their knowledge and valuation techniques to come up with a mutual fund that will potentially earn impressive returns. Of course, even if a mutual fund has done well in the past, a fund’s past performance is no guarantee of its future results. And these highly skilled fund managers usually command a high compensation and overhead, which in turn, trickles down to the investors in the form of management fees.

A passive mutual fund, as its name suggests, is not actively managed by a fund manager. Instead, these mutual funds usually try to mirror the performance of a certain market index and therefore don’t need someone deciding which securities stay and which securities go. Index funds are the most common passive funds and can save physician investors on fees while still providing returns reflecting the state of the market.

The key to choosing a mutual fund that is right for you is to balance the fees incurred by a fund alongside the risk in a particular fund portfolio. As always, discuss your options with a trusted financial advisor to see if mutual funds would enhance your overall investment strategy.