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.