Choosing
the best no load mutual funds based solely on their fees and expense
ratios might sound like a good idea. The rationale being that by
choosing mutual funds with low fees, investors can have more of their
capital invested. However, there are other factors to take into account
which should influence your decision on where to invest.
Low fees and expense ratios.
In their search for the best no load mutual fund, some investors tend
to select mutual funds based solely on their fees and expense ratios.
The rationale is that by choosing mutual funds with low fees, investors
can have more of their capital invested. Also, no load mutual funds
with low expense ratios will pass on more of the returns they earn to
their shareholders. However, metrics such as price/earnings ratio and
dividend yield on the S&P 500 index, a commonly used proxy for the
U.S. stock market, are hardly at bargain levels. Several market experts
forecast single digit annual returns for domestic mutual funds over the
next decade.
Is shopping for the lowest fees and expense ratios the right way to
select mutual funds? Not always. The answer depends on the type of
mutual fund you are evaluating, the time you can devote to evaluating
and managing your mutual funds investments, and the type of cost
incurred.
Investing in the Best No Load Index Mutual Funds.
If you believe markets are generally efficient and prefer to invest in
an index mutual fund to achieve an index-like return, shopping for the
best index mutual fund based on low fees and a low expense ratio makes
perfect sense. An index mutual fund's portfolio manager seeks to invest
the fund's assets to track an index as closely and as cost-effectively
as possible. Larger index funds have an advantage since they can spread
their operating costs over a larger asset base. Some of the interesting
index mutual fund options currently available include no load index
mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX),
Fidelity Spartan 500 Index Fund (Nasdaq: FSMKX), and Vanguard 500 Index
Fund (Nasdaq: VFINX) with expense ratios of 0.09%, 0.10%, and 0.18%,
respectively.
Investing in Actively Managed Mutual Funds and Strategies.
If you believe portfolio managers can add value and out-perform the
index through active management, fees and expenses are just one of
several important factors to consider. The portfolio manager's ability
and investing style are just as important. Therefore, seeking out the
best mutual fund based on just low fees and a low expense ratio may not
always be the right approach. Ensuring Your Mutual Fund Puts Your
Interest First.
Whether you prefer to index or take an active approach to managing your
investments, ensuring that your mutual fund is putting your interests
first is good investing practice. Mutual funds charge different types
of fees. By looking at some key factors concerning fees, you can get a
sense of whether the mutual fund puts your interests first or merely
seeks to line the mutual fund company's pockets.
Serving the Interests of Long-Term Shareholders - Some mutual funds
impose short-term trading fees to discourage frequent trading of mutual
fund shares. Frequent trading disrupts efficient management of the
mutual fund and increases operating expenses. A short-term trading fee
can therefore actually be beneficial to long-term shareholders if the
fee is rightly treated by the mutual fund company.
Passing on Savings from Scale Economies - The operating expenses
incurred by a mutual fund are a combination of fixed and variable
costs. As the assets of a mutual fund increase, the fixed cost gets
spread over a larger asset base. Therefore, the expenses incurred to
operate the mutual fund as a percentage of the fund's assets should
trend lower.
A mutual fund that places the interest of shareholders first must pass
on the savings from scale economies to shareholders. The trend in a
mutual fund's expense ratio therefore serves as a metric of how
seriously a fund takes its fiduciary responsibility.
