Hooray for Cheaper Funds!

Finding a great mutual fund isn't easy. The thousands available include many bad funds convincingly disguised as good ones. You'll want to look for a fund that has a long-tenured management team, a consistent investment process, and a decent performance track record.

But even if your fund meets all of those criteria, there are a few more tires to kick before buying. Expenses can be one of many funds' biggest stumbling blocks, since some funds simply charge too much for their services. But now, fund shops may finally be realizing that excessive fees can put them out of the running.

Caution: Falling expenses
A recent Wall Street Journal article highlighted cost competition's increasing importance in many fund sales. According to the article, over the past 10 years, 90% of new money invested in stock funds has gone to those with below-average expense ratios. Recent Investment Company Institute data confirms that investors consider fees extremely important when choosing a fund. ICI found that 74% of fund buyers focused on expenses; 69% looked at fund performance, while 61% considered the fund's risk level.

Overall, fund expenses have fallen significantly in the past few decades. In 2006, total fund costs ate up 1.07% of fund assets on average, compared to 2.32% in 1980. This is good news for fund investors and fund companies alike. But before you give the fund industry a humanitarian award, remember that overall fund asset levels are about 60 times higher today than they were in 1980. While it's nice that expenses have come down, the reduction is still disproportional to how much industry assets have grown.

But with the new proliferation of exchange-traded funds and index funds, pricing wars are becoming more and more apparent. With funds like these that merely track an index, cost often becomes the differentiating factor. After all, why pay more for one shop's index fund when another offers the same thing for half price? These new pricing pressures are carrying over into more actively managed funds as well. In fact, Morningstar reports that roughly half of all stock and bond funds are currently waiving some portion of fund expenses.

Measuring up
How do your fund's expenses measure up? The following chart details the average expense ratio for several different categories of funds in the Morningstar database:

Fund Category	Net Expense Ratio
Average Mutual Fund (all funds)	1.34%
Average Large-Cap Blend Fund	1.54%
Average Small-Cap Blend Fund	1.44%
Average Intermediate-Term Bond Fund	1.02%
Average Foreign Blend Fund	1.54%
Average Emerging Markets Fund	1.84%
Average Exchange-Traded Fund	0.52%
Average Index Fund	0.65%

Source: Morningstar Principia

If your fund charges more than the average in its category, consider looking elsewhere. There's no reason to hold onto an expensive fund when another can get the job done just as well at a lower cost.

Additionally, make sure you never buy a fund that charges any kind of load. These onerous charges are tacked on to fund sales to compensate brokers for their services in selling the fund. Loads aren't just unnecessary -- they're nothing short of highway robbery.

The future of fees
The wave of exchange-traded funds coming to market is likely responsible for some of the industry's current pricing pressure. That bodes well for investors, increasing the odds that this trend will continue. Expect prices to fall even more as fund shops increasingly begin waiving fees in an effort to gain market share. We're already seeing the beginnings of a pricing war in the ETF arena among big players such as Vanguard and Barclays, and that trend shows every sign of accelerating. Keeping an eye on your funds' expenses is another great step toward investment success.

Further fee-free Foolishness:

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Fool contributor Amanda Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. The Fool's disclosure policy doesn't cost a dime.