Mutual funds can be shark pit to the honest investor, if he doesn't know what he is doing. Who can forget 2003 when Eliot Spitzer, US Attorney General, brought charges and huge fines against some of the biggest names in the industry for late trading and marketing timing. There are the fat cat fund manages that pockets your hard earned money even before they invest any of it, in what is known as front loaded fund. Even when you lost money, they still get their hefty bonuses, don't you just hate when that happened to you.

Today I am going to show you 3 things to look out for to avoid this kind of pitfall and how to become your own mutual fund manager, investing for income and security. It is easier than you think. Now before we get started let me tell you a little story.

One day while talking to my banker he suggested that I should invest a portion of my RRSP into mutual funds, so I agree to do so. (This was during the 24 years that I spend in cooperate North America).The following year I receive my statement only to find out that I lost 30% of my portfolio. At the same time my bank receives an award for fund manager of the year. How can that be I contemplated, I lost my money and they receive an award!

Do you suffer this kind of mutual fund investment pain too?

That same year I enroll into the securities course, offered by the securities commission. This is the same course that qualified you to be a financial adviser and allow you to sell mutual funds and insurance. I took the course to understand how to manage my own finances.

Now here are the 3 things to look out for when investing your hard earned money in mutual funds.

The Fund Manager Must Have his own Money invested in the Fund:

If the fund manager cannot put his money where his mouth is, do not invest in his fund, he will not put enough effort and energy into it to return to you a profit. Did you know that less than 1% of mutual funds make money for the investor? There are no laws against the fund manager losing your money. You could invest into this fund for 40 years and the fund manager just slowly loses your money until there is nothing left.

There is a rule however that they cannot put all your funds into one company or one stack. They have to diversify and spread your funds across a large array of companies in different sector. Now this rule in itself is one of the reasons why funds lose money, over diversification!

Let us look at a scenario: You have $500.00 in your mutual fund, you place this money into 500 different companies or stocks as a way of diversification. At the end of one year about 490 of those companies will lose money and only about 10 will make money for you. So you end up losing money. Why because you were too diversified, you were spread too thin across too many different companies

Be Careful of Fund Manager that Practice Portfolio Dressing:

Portfolio dressing is when A fund manager have a lot of loosing stock or under performers in his fund, and he is too lazy to clean it up, (because weather the fund made a profit or not he is still getting paid) What this manager will do is Every last Monday or Friday of each month he will dump all the losers, (sell them on the open market, possible at a loss) because he does not want them (the losers) on his books for month end inspection. Now what follows is just mind boggling, The first Monday or Friday of the following month the fund manager will go back and buy the same losers that he sold the week before and hold them for another month until it is time to dress his portfolio again.

Never Give Power Of Attorney to Anyone you are investing with:

Do not give power of attorney to your broker or you portfolio manager; they will lose all your money by trading your account just for the commission. This is more of a problem with your broker than fund manager; however it is a word to the wise.

There are 3 main types of funds that operate in North America, close end fund, open end funds and (UITs) units' investment trust.