Monday, 7 March 2016

The Balanced Mutual Fund - sounds great but look again

There will be investors that are in Mutual Funds.  They have been in Mutual Funds from their 1st dollar invested and no matter how many people tell them that they are paying way too much (see my post on Mutual Fund MERs) they will stay in them no matter what.

RBC Mutual Funds

Here is the link to the RBC Mutual Fund Listing.  If you must stay in Mutual Funds.  You can still reduce your investing costs.  Avoid the Balanced Fund.  Now the name sounds safe, secure, almost like you are covering all your bases.  You are investing in safe and risky.  You are balanced.  A balanced fund in my view can bring confusion and complexity to an investor's portfolio when making it simpler is often best.

Going to our example of the RBC Mutual Funds.  Go to fund RBF272 Balanced Fund.  The MER is 2.16% and if you drill in.  Look at the top 10 holdings.  The names that stand out are RBC, TD, BNS, and Suncor.  Now go to fund RBF556 Index Fund.  The MER is 0.72% and if you drill in again, the top 10 holdings include RBC, TD, BNS, BCE, BMO, Suncor, and Enbridge.  Now there are a lot of duplicate holdings in these 2 funds.  The problem is a lot of investors could and I am sure they have picked both funds.  Now the huge difference is the MER.  2.16% vs 0.72% for almost the same holdings?  I think you can see where I am going now.

Now all Balanced Funds are created differently, while Index Funds are just that, they match the index in their allocation.

Here are 3 reasons why Balanced Funds are bad for you:

1. Who is the Fund Manager?

The Balanced Fund lets a complete stranger decide what he considers the best balanced allocation is for the Fund and this in his view is suppose to satisfy everyone's investment needs in the fund.  Highly unlikely.  The investment needs of an investor should be in the hands of a financial planner not in the hands of the Fund Manager who may not even be in the same province that the investor lives in.


What do I mean Cash Balances?  Well not all but some balanced funds have cash balances of almost 5%.  If you look at the year end or quarterly statements, they will most likely be a section that indicates the fund is holding a cash balance.  So that means you are paying the MER for someone to hold CASH?  And the MER is high too, too much cash means too much of your money is not working for you but instead is helping fund the MER paid to the fund manager.


I left the last item called Fees or MERs.  The MER applies to the entire Mutual Fund industry but for this post, the 2 RBC Mutual Funds are great examples of what to look for.  The fact that Canada has some of the highest MERs in the world and is repeatedly publicized and discussed but ignored by investors tells how powerful the industry has brain washed us into thinking Mutual Funds are great.  While a balanced fund can charge higher fees than its Index counterpart, I would rather own the lower fee just for the sake of a lower fee.

Final Thoughts.

Do not let the name, balanced fund confuse you.  You are not balanced at all,  there is no balance.  It is just another fund where the allocations are picked evenly.  This is definitely not worth your hard earned MER.  Go Index Fund.