Mad Money

Cramer: Mutual funds hiding something from you

Cramer: What's so bad about most mutual funds
Cramer: What's so bad about most mutual funds

Jim Cramer knows there's a good chance one of many is trying to win your money. He says don't give it to them.

"I know the companies that run these funds want your hard earned cash. And I think one of the biggest mistakes you can make as an individual investor is, with a few exceptions, to give it to them."

Cramer says unless the mutual fund manager is among the top managers in the industry, your money will serve you better in a different investment.

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That's because, "Unlike hedge funds, the compensation for most mutual fund managers is tied to the profitability of the firm, rather than the sole performance of the fund. Therefore, there's a strong incentive for mutual fund managers to generate fees rather than gains."

Cramer's crunched the numbers and he says that, "In study after study, year after year, it's been shown that the vast majority of actively managed mutual funds underperform their benchmarks," he said.

If that's confusing, Cramer says to think of it like this. If you have money in a mutual fund made up of large cap US stocks, it will most likely fall short of the return in the S&P 500. Or, if you're in a mutual fund made up of smaller companies, it will most likely fall short of the Russell 2000.

Therefore, rather than putting your money in a mutual fund, Cramer believes that you'll likely do better in an index fund.

History suggests that's the best way to go, unless your mutual fund manager happens to be one of the best in the industry. "It may sound simple, but in this case, don't over-think it."

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* It should be noted that rather than put money to work in either a mutual fund or index fund, Cramer advocates selecting 5 to 10 stocks of good companies, with solid balance sheets, strong industry position and quality management and then actively moving in and out of positions strategically.

However, he also realizes that many people don't have the time necessary to do that kind of active investing. What Cramer is saying here is that if you're looking for a passive investment, you'll do better with an index fund than most mutual funds.

Call Cramer: 1-800-743-CNBC

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