Cramer: These costly mutual funds could be ripping you off

With all of the different mutual fund and exchange traded fund (ETF) options out there, Jim Cramer's head is spinning. How the heck are investors supposed to know which ones to invest in when there are so many of them?

"The important thing is this: You have all sorts of ETFs and mutual funds out there, and they can all advertise. The companies that run these funds want your money. And of the biggest mistake you can make as an individual investor is to give it to them, with a few significant exceptions," the "Mad Money" host said.

If you are an investor who owns mutual funds, Cramer says you are probably getting hosed. There is just no other nice way to put it.

However, his beef is not with all mutual funds. Specifically, he warned against actively managed mutual funds with people deciding the stocks and securities to buy and sell.

Mutual Funds
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Cramer has an issue with actively managed funds because the managers don't get paid for delivering performance — they collect a fee from investors regardless of the amount of money they make for their client.

The amount of money they make depends on the size of assets that are under management. That means their biggest incentive is not for an investor to do well; it is how much of your money they can bring in.

To make matters worse; mutual funds also charge some of the highest fees in the business.

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Cramer recommended that the best strategy is for an investor to manage their own portfolio of individual stocks. But for those who do not have the time or do not want to do so, Cramer has a few tips to invest in mutual funds.

"You want a cheap, low-cost fund that mirrors the market as a whole. One that mimics the Standard & Poor's 500," Cramer said, "Index funds have ultra-low fees, and with an S&P index fund, you've got a vehicle that will let you participate in the strength of the stock market without having to spend the time picking individual stocks."

As for ETFs, Cramer says these are bad news, too, for those who are not market pros or managing a portfolio of individual stocks. Many ETFs rebalance every day, which can beat down any long-term performance.

One exception is the GLD ETF, as Cramer thinks of it as a simple way to play gold. But, in general, he does not recommend playing around with ETFs.

"At the end of the day, I think a cheap S&P 500 index fund is the least bad way to passively manage your money — better than the vast bulk of actively managed funds," he added.

Ultimately Cramer thinks an investor can beat the performance of an index by picking the stocks themselves. However, if you are not up for that task, steer clear of managed mutual funds and ETFs all together.

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