Copyright 2006 Michael Saville
Sometimes investors think of mutual funds as a straight choice between no-load funds or load funds, because that is what they read about in the financial or popular press. But, there are a host of mutual fund expenses that can be charged to a no-load mutual fund as well as a load mutual fund.
About 99% of mutual funds charged fees. So the trick is to find a mutual fund that has low yearly fees so that they don't significantly reduce the money you make on your fund. Mutual funds have a variety of costs. These costs include yearly management fees, administrative charges, taxes and loads.
Many investors are now familiar with loads because we frequently hear the terms, load or no-load in the media. The other costs are usually not discussed by the media but these can have a dramatic effect on how much benefit you get from the fund in real terms. Some mutual funds charge an upfront or back-end load, while others have no-load. Know what load your fund charges. Many are as low as zero, while others are as high as 8.5%.
Loads can be used to pay your broker's fee, and other administrative costs. Some, but not all mutual funds have 12b-1 or b fees. These fees are used to pay for advertising and other administrative costs. A fund with a 12b-1 fee of .25% or less is still considered a no-load fund.
Some mutual funds have what is called a low turnover rate. When mutual fund managers buy and sell a high number of stocks, with frequency, within a fund, it will have a high turnover rate, causing a higher capital gains tax, the opposite is true with low turnover mutual funds. Check the fund reports for the turnover rate. A rate of 80 or less is usually considered low.
Taxes are not a reason to not buy a mutual fund, after all, taxes are just a fact of life. For funds within a retirement account taxes are deferred until they are sold at retirement.
Index funds are known for their extremely low yearly management fees, because they are not actively managed. Some average .20%, which is extremely low, almost insignificant. All mutual funds are charged yearly management fees. These fees are the vehicles, which enable the fund to pay its costs. Choose funds with low yearly management fees. These will be charged for the life of the fund you choose; therefore it is prudent to focus on funds with low yearly fees. Examples of low fees are charges of 1.25% or less. Of course, you may be less concerned with management fees if the fund performs well. You can expect a typical growth mutual fund to return 12% or more with compounded interest. Don't forget, compounded interest happens over a period of years. Compounded Interest is the way interest is paid on mutual funds. This means interest is paid on previous principal and interest, not just the principal. Therefore you get interest paid on interest, over and over again. Compounded interest gives you a distinct advantage over simple interest savings account. However, in comparison, a 3% bank savings account could lose 2% to inflation and another 1% to taxes, with only simple interest returns, your true interest rate could be zero.
Mutual funds are liquid accounts, funds can be withdrawn at any time, without penalty in most accounts, (exceptions are accounts with back-end loads and retirement accounts). Know if your mutual fund pay- out date is quarterly, every six months (bi-annual), or yearly. If you take money out of your mutual fund pay-out date, you will loose your interest payment, on that money, for that year if it is yearly, and so forth. |
