Rekenthaler Report

Are Mutual Funds Hurt by Their Shareholders' Decisions?

John Rekenthaler

Forced Decisions
Mutual fund critics often argue that mutual funds are undermined by their shareholders. Cash flows from sales, or redemption requests, force managers to make transactions that they otherwise would not. Even if those trades prove to be sound, they generate costs.

The concern about transaction costs is overstated. It does apply to funds that invest solely in illiquid bonds, which have large gaps between their bid and ask prices. With other funds, that rationale dissolves. Brokerage fees for stock trades have effectively gone to zero, and spreads aren't far behind. Trading investment-grade bonds is cheap, too.

John Rekenthaler does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.