Control Over Your Portfolio

A potentially important issue that arises when investing in mutual funds is the loss of control over one's assets. A mutual fund shareholder buys into the mutual fund, turning his or her money over to the portfolio manager to make all the decisions. Although many prefer it this way, relieving them of the responsibility, investors in mutual funds still need to understand that they no longer have control over the stocks that are being held by the fund, and in some cases even sectors or countries invested in. Furthermore, they have no control over the recognition of capital gains from securities held, and so forth.

Assume you want to invest internationally but are adamant about avoiding Japan, given some of the dire predictions about what could happen to the economy of that country. With many international mutual funds, you may well have Japanese exposure whether you want it or not. Suppose you wish to have exposure to the consumer sector of the economy but you are determined to avoid tobacco company stocks because of how you feel about them. Here again, with a few exceptions, it might be difficult or even impossible to avoid these stocks. With some of the new alternatives described later, however, it is possible to accomplish both of the goals mentioned here.

Still a third area where investors give up most control over their investing positions when they purchase mutual funds is the area of taxes. This is such an important topic that I devote a separate section to it for discussion.