Why mutual funds are no longer the best investment

One of the best ways of investment used to be to buy a mutual fund. Mutual funds hold stock for you, make sure you get the best interest, or at least they used to. The idea was that the management of the fund, who knew how the stock market worked, tracked the performance of the companies and their stock, and made sure that the holders of shares in the fund (who do not own the actual stock) get the maximum dividend by a combination of holding stock with high dividend and selling shares which underperform.
That was the theory. This works fine under three conditions: when the management of the mutual fund really cares about increasing the wealth of the fund members; when the fund managers know more about the market and have easier access to it than ordinary people; and when the fund members do not care about the work of managing their money.
It was not too many years ago that us ordinary people could not trade on the stock market. The share prices were published in the newspaper, but owning stock was very unusual. Unless you were some kind of industrialist or financier.
That changed, and when day trading became possible during the IT boom, it became possible for anyone to trade on the stock market, too. It is possible to make money by buying cheaply and selling when the price has gone up, just like any other market. The difference is that the transactions happen much more often, even if one of the changes that made day trading possible is that they can be smaller than they used to be, and are fulfilled in real-time, since stock certificates are neither used nor needed any more.
That made another change possible that removed another information information advantage the fund managers used to have: Knowwing the prices. First day traders, then algorithmic trading robots, changed the way the market works. A trading robot works by making a huge amount of trades faster than a person can, using an infinetesimal price movement to make money. For people it makes no sense to try to outcompete them when it comes to trading, even if it can be done - if the programmer was not smart enough. Nobody has more information than a trading robot, and no human can process it as fast. There is no information advantage for fund managers any more, especially since they are regulated and can take only limited risks with their clients money. Not like hedge fund managers, who can take any risks with their clients money.
But mostly it is better to try to find stock worth holding in the long run. And that is what the mutual fund managers are supposed to do. Their job is to make investments that do not decrease in value, and grow at a decent pace - not less than the market as a whole.
The market value is measured by an index which changes every now and then to reflect the combined value of all the stocks traded on the stock exchange. This used to be an art to track, but algorithmic trading turned it to a science, which then quickly became a commodity when the first index funds came out. They do not try to beat the index, they try to be the index, by holding exactly the same shares in exactly the same proportions as the index. And you do not have to pay any fee, as a rule. They are traded on the stock exchange, so you pay to buy or sell them, but otherwise these funds give you a return which is equivalent to the growth of the economy as reflected by the stock market - at least, that is the theory..
So a mutual fund manager has to figure out a different way to make money. At least, if they care about the members of the fund. That condition has become more and more unusual as the financial crisis has exposed more and more of the true interests of Wall Street. Or maybe it was before the crisis.
It is no problem for anyone to buy stock on their own any more. The risk is no smaller than trading yourself on the stock market. But unless you trade often, the fees may be higher. So the only reason to have your money in a fund is that you do not care - and that you do not care about paying the fee for a job you could have done yourself.