The Hottest Fund Trend in 25 Years

Trends that emerged in the '80s were not all created equal.

Mercifully, mullets and spandex have been given the axe -- but declining mutual fund fees and expense ratios remain in vogue. According to a recent report by the Investment Company Institute, fund fees and expenses are at their lowest levels -- less than 1.1% -- in more than a quarter century.

What's more, investors are taking advantage. From 1997 to 2006, 90% of investors' new purchases went to funds whose expense ratios were below average. But it's not all Cool Whip and cherries.

As Motley Fool Champion Funds analyst Shannon Zimmerman said recently, "The industry has been given a message; but fees have not fallen far enough."

Too much partying in the back
That's particularly true when it comes to some of America's most widely held actively managed funds (as measured by total assets under management):

While these expense ratios look attractive -- ranging from 0.52% to 0.69% -- only Dodge & Cox Stock (a fund that's now closed to new investors) doesn't charge a massive 5.75% front-end load. That's a commission charge that will take a hefty bite out of your assets before any one of these fund managers makes you a dime.

And it gets worse. Both the Growth Fund of America and the Investment Company of America charge annual 12b-1 fees -- 0.25% and 0.23%, respectively. That's another chunk of your assets disappearing regularly to help a fund you already own market itself to new investors.

Until we start demanding the termination of front-end loads and 12b-1 fees, this decades-long movement toward cheaper asset management won't be complete. Though many funds are now load-free, the average front-end load in 2006 was still a massive 5.28%.

Fly high, free bird
We've all made mistakes, whether it be Charles Barkley-esque short shorts or bulky shoulder pads. But we've moved on.

And if you're paying too much for a mutual fund -- and particularly if you pay an annual 12b-1 fee -- you should consider doing the same. Indeed, cheaper funds are often the better performers.

Rock the casbah
If you're in the market for a new mutual fund, start your search by demanding:

1. No load.
2. An expense ratio lower than the fund's category average.
3. Long-tenured managers who have invested their own savings in the fund.

That's the framework Shannon Zimmerman uses to start finding winners for his Champion Funds service, and his recommendations are beating their benchmarks by 15 percentage points on average. Even better, every one of his more than 50 picks has made money for investors since being highlighted in CF.

You can check out those picks by joining Champion Funds free for 30 days. There is no obligation to subscribe. Click here for more information.

Kelly Giedraitis does not have a mullet and does not own shares of any of the companies mentioned. Microsoft is a Motley Fool Inside Value pick. The Fool has a disclosure policy.