Mutual Fund Size

When investing in a mutual the size, or assets under management, is important. A small fund may not have the ability to properly diversify. Too large of a fund may not be able to achieve the anticipated performance. How can this be?

By definition a mutual fund that claims to be diversified must meet the 75-5-10 test. 75% of the assets must be invested in securities of other issuers. 5% or less of the assets may be invested in any one company. 10% or less may be owned of any company's outstanding voting stock.

Why is this important? Once a large mutual fund buys the limit of a company and still has money to invest it can either hold the cash or invest it. Since the purpose of a mutual fund is to invest, it finds another company to invest in and buys. As more money comes in, the stock of more companies must be purchased.

With time the largest mutual funds will start to look like an index fund as they have to purchase lots of companies. The only problem with buying the largest mutual fund instead of an index fund is the amount of fees. Index funds have a lower fee structure. If the choice is either one of the largest mutual funds and pay higher fees or an index fund, go with an index fund.

Bottom Line: If you are going to pay the money for an investment advisor, the advisor should understand the importance of an optimum fund size and not necessarily buy the largest mutual funds.