Wise readers don’t want to overpay when investing in mutual funds. Here’s a typical question on the subject: "You wrote about paying attention to mutual fund expenses but never said what are acceptable expenses or how much is too high. Can you elaborate?"
Fund expenses include many things, such as commissions or "loads" when you buy a fund and/or redemption fees or "back-end loads" when you sell it, as well as ongoing operating expenses, including a management fee to the people who manage the fund’s portfolio.
Funds sold by brokers typically charge commissions when you buy and/or redemption fees if you sell before a certain time. Commissions for large purchases tend to be lower in percentage terms. Or, in lieu of a commission to buy, you may pay higher ongoing "service" or "distribution" fees on top of the management fees and other operating costs.
Different "share classes" of broker-sold funds reflect these different cost structures. The one that’s best for you will probably depend on how much money you invest and for how long.
I make my own investment decisions and buy only direct-marketed "no-load" funds that do not charge any commissions or loads. If you need professional advice, consider a fee-only adviser who is free to recommend any fund, including no-load funds. If you use an adviser who can recommend only from a list of load funds approved by his firm, I suggest you favor those with low ongoing operating expenses.
That way, at least your costs are low once you pay the initial load. For example, the class A shares from the American Funds Growth Fund of America, a fund with a strong long-term record, impose an upfront sales charge or load as high as 5.75 percent. But annual expenses are just 0.76 percent, about one-half the industry average for stock funds.
Ultimately, a fund’s annual operating expenses — the so-called fund’s expense ratio — may have a much greater impact on your wallet than the initial load.
Not all funds charge loads, but all funds ding you for operating expenses that subtract, dollar for dollar, from your returns.
Therefore, I will not buy a fund with an expense ratio so high that it makes it very difficult to achieve the returns I could more easily obtain with another fund.
For index funds that simply track a broad market benchmark, I want annual expenses no higher than 0.20 percent. With actively managed stock funds, I generally avoid those with an expense ratio of more than 1 percent, and for actively managed bond funds, of more than 0.50 percent.
That doesn’t mean I will never buy a fund with higher expenses, but there has to be an overriding factor, such as a consistent investment approach with a record of solid returns in good times and bad despite the higher costs.
Even then, I’ll try to find a cheaper alternative.
I have used — and can recommend — a fund analyzer tool at the website of the Financial Industry Regulatory Authority (www.finra.org/fundanalyzer) that lets you screen for mutual funds and exchange-traded funds based on factors such as investment objective, expense ratio and ratings by the fund analysis firm Morningstar.
You can compare as many as three funds side by side and see how their expense ratios stack up against the industry average of similar funds.
Other newly added features include one-click access to a fund’s prospectus and other disclosure documents, and a report in portable document format that you can print or save.
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