INVESTMENTS  -  FUND EXPENSES
 
 

It’s very important to understand and consider all commissions, annual expenses, and management fees before you invest in a fund. While such expenses and fees won’t knock all the potential profit out of your investment, they can certainly cramp you investment’s performance. How much? Say you invest $1,000 in a fund that charges a 6% load (commission) and turns in a 10% performance for the year. You still earn the 10% -- but not on $1,000. Rather you earn 10% on $940. That may not sound like a lot, but since you start out with less money working for you at the outset with a load fund, the ultimate return will be less, all other things being equal. But don’t make a common mistake of thinking that no-load funds mean no management fees whatsoever. Every fund charges management fees and expenses. (Some may temporarily waive these charges as an inducement to new investors.) Nevertheless, some funds’ fees and expenses are far more reasonable than others. You’ll need to shop around – for the best fund with reasonable annual expenses.

Load Funds

A load is an up-front sales commission charged and deducted from your initial investment amount. Load charges range as high as 8.5%, but most are in the 4 to 6 percent range. Is the load justified? If you use someone to advise you on selecting a mutual fund, that person deserves to be compensated. On the other hand, by doing a little of your own research, you can avoid paying a load, and you’ll have more money going to work for you from day one. Don’t believe the common sales pitches that load funds outperform no-load funds or that load funds have lower annual expenses than no-load funds. They don’t on both counts. With a little bit of effort, you can find a no-load fund that is every bit as good as any load fund.

Low-Load Funds

Another subspecies of mutual funds is the low-load fund. These funds typically charge a fee of between one and three percent. While this assessments isn’t too onerous, it’s up to you whether it’s worth paying to get into the fund.

No-Load Funds

No-load funds charge no initial sales commission fee, so not only are you taking advantage of one of the most successful, simple, and strategic investment vehicles – mutual funds – but you are doing it at a minimum cost to yourself.
 
 

Other Fees and Expenses
 

Back-End Loads

More commonly known as “redemption fees” (although there’s little that is redeeming about them), they are taken from the net asset value of your shares when you sell them. The immediate result is that your profit is diminished, or your loss is increased.

Deferred Loads (Contingent Deferred Sales Charges)

Some funds impose a deferred load that kicks in if you redeem your shares before a specified time, often five years. In such instances, your initial investment amount is docked a percentage amount, and this percentage usually declines the longer you hold the fund. Even though deferred loads may seem disagreeable, in principle they make some sense. How so? They are meant to discourage investors from jumping into and out of the fund.

12b-1 Fees

Some funds deduct the costs associated with advertising and marketing themselves directly from the fund’s overall assets rather than from management fees. The charge associated with such deductions is called as 12b-1, and it typically amounts to one-quarter to one-half of one percent, but can range as high as 1.25 percent. Some funds even feed a portion of the fee to the broker who sold you the fund unless you use a financial advisor who is putting you into funds with no up-front loads (whose compensation is reflected in the 12b-1 fee). Avoid funds with 12b-1 fees greater than .25 percent.

Expense Ratio

Located in every fund’s prospectus, the expense ratio is a critical management-cost indicator for would-be fund investors. It is the annual cost of running a fund expressed as a percentage of the fund’s assets. Mutual fund expenses include all annual costs of running the fund including the 12b-1 fee, if any, but excluding brokerage commissions for buying and selling the fund’s securities.

Expense ratios vary from fund to fund – often widely. So it behooves you to check out a fund’s expense ratio. Bond funds are cheaper to run than stock funds. A bond fund should generally have an expense ratio of less than 1 percent, while any stock fund with an expense ratio of more than 1.25 percent is on the high side. Excluded from these general rules of thumb are specialized funds, particularly international funds, which may have considerably higher expense ratios because of the specialized nature of their investment activities. While the most important criterion in selecting a mutual fund is past performance, don’t ignore expense ratios. Look around. You’ll find many good-performing funds with low expense ratios – the best of all worlds.

Smart investors pay attention to fund expenses. Sure, when most funds are posting double-digit annual returns, a high-expense fund isn’t going to drag down your returns very much. But high expenses still put a dent in investment returns and when market gains slow down, you’ll be glad you’re in low expense mutual funds.

Morningstar, the venerable mutual fund monitoring company, will provide expense information for individual mutual funds on its web site: http://www.morningstar.com. But you can get a better idea of how the expenses of a fund you’re interested in or you already own stacks up by going to your local library and referring to either Morningstar or The Value Line Mutual Fund Survey. Both services not only show a fund’s expenses, but they also show how each fund’s all-important expense ratio compares with the average expense ratio for similar funds. Remember, as opposed to an initial load, which is a one-time charge, the expenses reflected in a fund’s expense ratio come out of your hide each and every year.