Written by Milan Amini (@MilanAmini1 )

Over the past few decades, investors have become increasingly confident in putting their money into mutual funds. As of September 30, 2014, Canadian investors had about $1.12 trillion held in mutual funds. A more surprising stat is that Canadian investors have greater confidence in mutual funds than any other financial product, including stocks, bonds and GICS. Through an analysis of what a mutual fund is, it is clear to see why this investment vehicle has gained popularity.

A mutual fund is an investment that pools money from various investors to invest in a wide arrange of securities such as stocks, bonds, money markets and more. Fund managers, whom get paid a fee for their services, maintain the portfolio. Investing in a mutual fund allows you to take advantage of the diversity within the asset class. Buying into a mutual fund gets you a piece of a portfolio that invest in a number of stocks, bonds and other holdings depending on the fund. Additionally, you can buy a mutual fund that invests in just about anything. There are funds that are aggressive, conservative or something in between. There are funds that invest only in emerging markets or funds that invest in oil, gas and other commodities. This means that whatever risk profile you have as an investor; there is a fund for you.

Ironically, many of these advantages are also disadvantages to mutual funds. Being very diversified in nature, many funds run the risk of dilution. This means that they’ve invested in so diversely, that any strong performing holding wont have much effect on the overall performing of the fund. Also, there is much criticism of fund managers. Many investors feel the fact that fund managers get paid regardless of the performance of the fund discourages them from actively maintaining the portfolio. Finally, and most importantly, the single biggest disadvantage to mutual funds is the fees.

High fee structures coupled with unknown or sometimes hidden fees are a large factor in what deters many investors from buying into mutual funds. The average fund will charge a yearly fee for the service of the fund managers. Additionally, transaction fees are usually paid when you buy in or get out of a fund, these are known as “loads”.

A front-end load structure simply means that you are charged a percentage of your investment as the beginning (or front) of your investment. To illustrate, and investment of $10,000 into a 5% front-end load would see $500 go to sales charges and $9500 into the fund.

A back-end load structure (surprisingly) is not the opposite of a front-end load. Commonly, back-end loads depreciate over the time you hold the fund. This means that your fee if you want to sell decreases over time. Lets arbitrarily say that fund A has a 5% back-end load that depreciates to 0% over 5 years. This means that in year one your fee would be 5%, in the fourth year it would be 4% and so on till 0%. If you hold the fund till the fee gets to 0% you don’t pay any fees. This is to encourage capital to stay in the fund. Finally, some funds offer a no-load structure. This simply means that there is no commission charged to you.

As you can see from the fee structure of mutual funds, this investment vehicle is designed to be held for the long term. High fees make it virtually impossible to make money quickly. This type of investment is structured to be grown and contributed to over years. Even if you’re able to find a needle in a haystack that experiences quick growth over a relatively short period of time, fees will eat much of those gains up.

It is recommended that you only invest in a mutual fund if you have plans to hold on to it at least till your fee is eliminated (assuming a back-end load). It is also helpful to contribute to your fund on a weekly, monthly or quarterly basis; whatever suits your investment style.

Researching funds is a bit of a process as the number of funds is so vast. I recommend using Morningstar to conduct any research as they specifically deal with mutual funds and ETFs. Investing is the right mutual fund can offer competitive returns when compared to other investment options, but only if invested for the long term.

Disclaimer: Investors should be cautious about any and all investment recommendations and should consider the source of any advice on investment selection.

All investors are advised to conduct their own independent research into individual investments before making a purchase decision. In addition, investors are advised that past performance is no guarantee of future price appreciation