Mutual Funds: Expenses

Everyone likes to talk about a fund's performance. But a facet of a mutual fund worthy of equal consideration that often gets the short shrift is its expenses.

A fund's expenses, which cover several fees and costs, are a significant determinant in overall performance. Typically, expenses can be as low as a fraction of a percentage point for index funds or exchange-traded funds or as high as 8% or 9% for funds that carry a sales charge, or load, because they are sold through a broker or financial planner who gets a sales commission. Do more expensive funds deliver better performance? There's no evidence to support that, so investors won't necessarily get burned for bargain hunting for funds (just don't gloss over a fund's performance record and manager).

There are a number of fees and expenses that a fund may offer, and they are always listed in the prospectus, so investors should check them out. Here's a quick list of some of the charges you might find:

Management Fees: This is what you pay for the management to run the fund. Typically, these fees run from a fraction of 1% to more than 2%.

12b-1 Fees: These fees, also known as distribution fees, pay a fund's marketing bills. Not all funds charge them, so this is a spot where investors can cut costs.

Redemption Fees: It often costs funds time, effort and money when investors buy and sell the offering. To discourage this, many funds levy redemption fees on investors who sell out of a fund within a certain period.

Turnover, Loads and Taxes

There are other cost matters to consider. First off, if a fund has a high rate of turnover, meaning the manager holds stocks for a short period and turns over his portfolio frequently, that typically results in higher costs, because there are expenses associated with trading.

Also, whether a fund carries a load, as discussed above, is a big factor in your bottom line. These loads have virtually nothing to do with performance; they are used as a sales commission. In fact, many funds are offered as load or no-load funds, with very little or no difference between them, apart from the fact that the firms have brokers helping to peddle their wares. So, choosing a no-load fund over a load fund is a pretty easy way for investors to protect their wallet.

Taxes are also an important consideration when buying a fund. Tax-efficient funds implement strategies, such as keeping turnover levels low or shying away from companies that offer taxable dividends, to keep tax costs down.

Minding Your Expenses

Deciphering all of the myriad expenses a fund carries can be a Promethian task. TheStreet.com's Personal Finance group is watching the bottom line, so you should check in with us if you want to do the same. For starters, here are a few articles that explore fund expenses:

Things You Didn't Know You Need to Know About Your Mutual Funds

Nasty But Unnoticed Fund Fees Eat Away at Your Returns

Who Pays a Fund's Trading Costs?

Are a Fund's Expenses Deducted Daily From Assets?