Investors Should Pay Attention to Fund Costs |
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By: Alex Villanueva Posted: 2009-09-12 03:38:11 |
| The stock market is an excellent way to grow your savings in the long term. Many people decide against investing individual stocks and decide to put their money in mutual funds. In general, this is a good idea. However, many only pay attention to performance. Fees are almost an afterthought (if they are even noticed). This is a bad idea.The annual fee of a mutual fund is usually referred to as the expense ratio. This number does not seem high. Usually it is around 1-2% a year. Most everyday people would not consider that a burden. But overtime these fees really add up. Remember, fees are taken every year and taken as a percentage. You will suffer from negative compound interest. And remember, in the long run the vast majority of mutual funds don't out perform the index. But investors still have to pay fees, which means their money would have just been better off in an index fund.A big fee you should look out for are "load" fees. Usually they are "front-end", which means they are charged upfront. They are used to compensate the broker. Often this fee is around 5%. This is huge. It will be very difficult for a mutual fund to outperform its index with a 5% penalty and management fees every year. But also remember that most people don't stay in the same mutual fund for ever. Hot funds go cold. Fund management constantly changes. If you have a tendency to be putting and pulling money have mutual funds with load you will pay a lot in fees. This is why no load mutual funds have greatly increased their popularity in recent years. |
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