Soaring debt levels are topping the list of financial concerns as we head into 2013 and FP Personal Finance wants to help. Financial planner and FP columnist Jason Heath will answer readers’ financial questions and help show the true cost of everyday decision making. Email queries to personalfinance@nationalpost.com .

Q   If mutual funds are so bad, what am I supposed to do with my RRSP? I need the tax deduction.

Mutual funds have received a bad rap. In part, I think some of the criticisms are valid. But not all mutual funds are created equal. And beyond that, there are alternatives to mutual funds for your RRSP contributions.

One criticism of traditional, retail mutual funds relates to the fees. Costs and value are both important to assess when making any retail purchase and fees for mutual funds are no different. Some mutual funds have high fees that relate to good features like access to a unique sector or market or hedging foreign returns back to Canadian dollars. Other mutual funds have high fees that don’t seem to be at all justifiable.

Canada has the highest mutual fund fees in the world by a long shot, and there is no shortage of neutral, academic, international studies that suggest that mutual funds, as a broad group, cannot provide above-market returns net of fees. As far back as the 1960s, Becker and Jensen suggested that active managers of institutional plans and mutual funds underperform market indexes.

On the other hand, there has been research, including the 2007 Active Share report from Yale’s International Center for Finance, that suggests that “funds with the highest Active Share, smallest assets and best one-year performance seem very attractive even after fees and transaction costs, outperforming their benchmarks by about 6% per year.” They assert that their methodology enables investors to identify “different types of active funds as well as to focus on the ones that are truly active” and have a greater likelihood to outperform.

So it seems there is academic evidence of some mutual funds being able to outperform — perhaps taking advantage of their lazy, less nimble peers that, on average, appear to erode value.

The biggest misconception about mutual funds is that they’re the only option available to RRSP investors. Quite to the contrary, the myriad of choices Canadians have today is pretty significant.

I feel that mutual funds are appropriate in certain circumstances. In fact, I cannot in good faith say that any financial product is wrong for everyone, so in that regard, everything is right for someone. But some financial products aren’t right for many and some are wrong for you.

If you have an investment advisor who is only licensed to sell mutual funds, they cannot offer you any other financial solutions, even if they are better for you, unless they turn you away. Turning you away is tantamount to saying no to a bonus. Have you ever turned down a cheque from your boss? To be fair, it’s a human temptation, not simply a financial industry one.

You need to be clear that if your investment advisor can only sell you mutual funds, it’s up to you to learn about and consider the alternatives and assess what is right for you. If you walk into a soup restaurant, is an employee likely to say, “no soup for you?” Only on TV.

Some investment advisors are licensed to sell stocks and bonds, which are alternatives to mutual funds, good or bad. You can buy them with an investment advisor and essentially build your own mutual fund, often for half the fees or less than you would otherwise pay for an average mutual fund portfolio. A mutual fund may seem more professionally managed and “safe,” but keep in mind, a mutual fund is just a bunch of stocks and/or bonds in the first place.

You can also consider buying exchange-traded funds or ETFs, which are low-cost, passive investment vehicles that mimic the ups and downs of certain markets and are the stock equivalent of index mutual funds. Fees tend to be lower than that of active mutual funds because there’s no money wasted on research about what to buy or sell.

And if you’re willing to do a bit of the heavy lifting, you can buy and sell your own stocks and bonds for under $10 per transaction with online brokers. But buyer beware! I think the best approach for a self-directed investor is slow and steady.

In summary, mutual funds, as a group are neither good nor bad. They are an option for investors and that’s all they are. There are other options too — some good, some bad. But don’t avoid an RRSP contribution simply because of fear of funds. The right ones might be right for you, though many investors can consider other options as equal or better mutual fund alternatives as well.

Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto