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.
