|Brenda Buttner, Host of Bulls & Bears, Saturdays, 10 am ET|
Long considered the only "safe" investment in a scandal-scarred financial world, in the past few months mutual funds have erupted in disgrace. CEOs resigned; the feds and state regulators pointed fingers at widespread abuse; investors bolted from tainted funds.
What went wrong? Conflicts of interest and deal-making ran rampant in some shops. After the closing bell rings at 4 pm trading ends, but the news doesn’t stop. In some mutual fund companies management traded on that news or allowed select clients to do so. It also watched overseas markets for major news and did the same. In this way it could make a lot of money through "market timing" and "late trading." Illegal? No. Unethical? Yes. Common? Perhaps more than we can imagine. The SEC says half of the largest mutual funds companies had allowed some companies to take part in this practice.
How expensive is it to you? By some estimates, it costs about 1% in lost returns, or about $10 for every $1,000 invested.
You may also pay in another way. As investors bail out of these dirtied funds management has to sell its holdings to give them cash. It may or may not be a good time to do so. One other big fund flaw that hits all investors whether or not they invest in the "bad" funds: fees. As more and more of us put our investment dollars in the fund world fees were supposed to go down, not up, according to economies of scale. But, in this 7 trillion dollar industry, fees have climbed and remain stubbornly high. So we are paying a lot of money for returns that rarely beat the market and, as we have recently learned, for the chance to be cheated.