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Cramer: These costly funds could be ripping you off

Key Points
  • CNBC's Jim Cramer ticks down common mistakes made by investors when buying a mutual fund or ETF.
  • If you're an investor who owns mutual funds, Cramer says you're probably getting ripped off.
  • The "Mad Money" host did make one exception to his issue with funds.
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These 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," CNBC's "Mad Money" host said. "Companies that run these funds want your money. And one of your biggest mistakes you can make as an individual investor is to give it to them, with a few significant exceptions."

If you are an investor who owns mutual funds, Cramer says you're 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.

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.

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.

"If you don't have time to run your own portfolio the I really want you to own a cheap, low-cost index fund that mirrors the S&P 500," Cramer said. "This may sound like a really simple solution, but don't over-think it. The whole point of putting your money in a mutual fund is to save you the time and effort required to manage your own portfolio of 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 really the least bad way to passively manage your money — better than the vast bulk of actively managed mutual 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.

WATCH: Cramer's take on mutual funds

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Cramer: These costly funds could be ripping you off

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