What To Do Before Buying Mutual Funds

Before buying mutual funds, consider the impact of fees on your long-term returns. Two funds with similar past performance can give you drastically different results, due to differences in fees.

Did you see the Frontline expose called "The Retirement Gamble?" It raised alarm bells for me, and probably a lot of other people, as it was meant to do.

In it, they reported that our investment earnings over time could be as much as 30% lower than they should be.

This is the impact fees can have if we aren't paying attention to the hidden expenses we pay for mutual funds in our investment and retirement accounts.

Thirty-percent!

That's the difference between $100,000 and $70,000, or a years' salary for some people. Or a difference of $500,000 versus $350,000! Just by choosing a fund with higher fees, even if the fund performs well otherwise. Clearly, a little mutual fund research is in order if we want to make the most of our investing dollars.

There are all kinds of fees involved in owning shares of a mutual fund. In this article, you can learn a little about what to look for to evaluate how fee-heavy your current investments are. And right after I post this page, I'll be doing the same with my investments, because before now I only looked at 2 types of fees: load/no load and expense ratios.

Disclaimer: I'm not a financial expert, and the information provided here is based on my own research and interpretation of things I've read. I'm an individual investor, not a financial professional. If anything in this article is incorrect, and you are a financial expert, please feel free to contact me with corrections.

Before buying mutual funds, look at the fees described in the prospectus and/or on the summary of fund information on your brokerage account.

Here is a description of the different well hidden fees and details that can cost us so much over time. I hope you will take the time to log in to your investment account and look at your fund expenses, ASAP!

Mutual Fund Fees

Load versus no-load

"Loads" are sales commissions and their purpose is to compensate the financial advisor who recommends the fund to you. If you find them in accounts and funds you manage yourself, such as mutual funds in your Fidelity or E-trade account, the commission goes to the company who offered them to you (Fidelity or E-trade, etc.)


Management Expenses aka Expense Ratios

You'll see this type of fee expressed as an Expense Ratio, with rates such as 1.5% or more or less. The management fee compensates the fund managers who decide what the fund invests in and when to buy or sell the underlying investments within the fund.

Index funds have the lowest expense ratios because they follow a fixed set of securities and they don't need "rock star" fund managers who require high compensation.


Miscellaneous Fund Fees: Redemption fee, purchase fee, exchange fee, account fee.

These fees are charged by some funds to their shareholders for various "events". These fees are paid to the fund to cover expenses.

For example, some funds may charge an account fee when your holdings in the fund fall below a certain dollar amount.

Distribution or Service Fees

These fees cover expenses such as preparing and mailing of prospectus documents, advertising and marketing, and similar expenses.

These are also known as "12b-1" fees named for the laws governing and allowing these charges.

Turnover Rate

One variable expense within a fund is the cost of trading the underlying investments. Some funds are more active than others in this regard, and this activity is expressed as the turnover rate.

Where to look for expense info

In this screenshot, you can see that there is no transaction fee, and that the expense ratio is 0.91%.

Also, Morningstar indicates it has below average expenses.

mutual funds data sheet

So, before buying mutual funds, take the time to look into the fees you will be paying. At the very least, understand the expense ratios of the funds you are considering. Consider no-load funds and index funds as a way of reducing investment expenses.

As you narrow down the specific funds that meet your investing strategy, take the time to do a mutual fund comparison of key metrics including expense ratios, turnover rates, and professional ratings as well as mutual fund performance stats. (I like to use Morningstar ratings to help in choosing funds, but there are others to consider.)

Over the long run, fees can greatly reduce the return on our investments and cost us many thousands of dollars.

This means we need to spend a little more time examining the funds available to us.

This extra time could be worth a lot of money.

At the very least, we need to compare the fund expense rates and sales charges. I'll be looking into index funds the next time I work on my investments. How about you? If you have the time, watch the Frontline episode, too.


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