The ideal mutual fund must have several key attributes: a seasoned management team, a consistent investing strategy, and a positive track record. Most importantly, its expenses shouldn't cost you more than the fund actually returns.

Tipping the expense scale
Surprisingly, funds really can get away with this. I ran a quick search in Morningstar for funds with the highest net expense ratio that were still open to new investment.

The winner of this (un)distinguished contest is Frontier Micro Cap (FEFPX), with an eye-popping 18.4% expense ratio. Yes, you read that right. The Frontier Micro Cap fund seeks to invest in companies with less than $400 million in market capitalization, including holdings such as Pressure BioSciences (NASDAQ:PBIO), LJ International (NASDAQ:JADE), and Bradley Pharmaceuticals (NYSE:BDY).

Now, micro-caps are a notoriously volatile bunch, and much less liquid than stocks further up the capitalization spectrum. It may be understandable for micro-cap funds to charge a bit more than their large-cap counterparts. But does that justify expenses that devour almost one-fifth of every investor's assets?

Size does matter
Unfortunately for the Frontier fund, its high expenses stem partly from its small size. It currently has just less than $250,000 in assets under management -- a sum so low, I'm not sure how it stays afloat. The smaller a fund's net assets, the smaller the base across which management can spread expenses. If the fund had $2 million instead of $250,000, the proportion of assets paying for expenses would shrink, making the fund cheaper for all shareholders. Of course, this fund has always been small -- assets apparently peaked back in 1995 at $1.3 million, and they've since steadily dwindled.

Not-so-pretty performance picture
A quick look at the fund's track record sheds some light on why the fund's so small. Witness Frontier Micro Cap's annual performance over the past 10 years:


Frontier Micro Cap (FEFPX)

Russell 2000 Index










































Source: Morningstar Principia

Yep -- in the past 10 years, the fund made money only in the highly speculative days of 1999. With these returns, no wonder the fund's assets have diminished so dramatically! If you'd been invested in this fund during the period shown above, you'd have lost more than 28% of your investment every single year on an annualized basis.

Run away!
Frontier Micro Cap is caught in a death spiral. Following appalling returns, investors pull money out; the expense ratio rises, returns get even worse, and investors withdraw even more assets.

To keep this fund alive, its management must improve its returns and inject it with new capital. Both are easier said than done. Small-cap stocks have been particularly hot over the past seven years, and they may soon lose momentum compared to more neglected sectors. And the fund's high expenses and abysmal track record make it nearly impossible to woo new investors, which may require managers to prop up the fund with their own money.

While the future may look bleak for Frontier Micro Cap, at least this fund's fate can teach investors everywhere that expenses matter. A fund with stratospheric expenses simply can't compete with the market. By carefully examining the expense ratio before buying any mutual fund, you can avoid forking over too much of your hard-earned cash without getting anything back in return.

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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 has a disclosure policy.