We've all heard advice about how looking for mutual funds with low costs can make a huge difference. After all, even seemingly not-so-significant annual costs and fees can eat up big chunks of your nest egg.
For instance, if you invest $50,000 in a fund that charges 1% per year and earns 8% annually, you'll pay almost $7,500 in fees over a 10-year period. You'll also lose over $2,800 more due to lost returns on those fees. In contrast, a fund that charges just 0.15% costs less than $1,200 in fees and $400 in lost returns. That's a big difference.
Where to find low fees
If you're shopping for lower fees from your funds, here's where you can look:
Though some index funds are inexplicably costly, many are bargains. The Vanguard Total Market ETF's
(AMEX:VTI)expense ratio is a mere 0.07%, versus 1% or more for the typical stock mutual funds. With an annual turnover of 5%, a minimum initial investment of $3,000, a dividend yield recently around 3.1%, and top holdings that include Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), and Chevron (NYSE:CVX), it's a compelling consideration.
- No-load funds. With so many terrific no-load funds available, why voluntarily sign up for a load fund and pay what is essentially a one-time sales fee of up to 8.5%? Of course, here and there you'll find some funds that can still be worth investing in despite their loads -- especially if the loads are on the low side. And conversely, many no-load funds can be stinkers and can levy plenty of other excessive fees on shareholders.
- Big funds. Many funds charge less as they get bigger. That's because there are economies of scale to managing money -- that is, if you have twice as much money to invest, it won't cost you twice as much to manage it. On the other hand, larger funds often have a harder time earning extraordinary returns. So, going too far to reduce your costs can backfire on you.
Another item worth noting is turnover in a fund. This figure reflects how much buying and selling a fund does. The greater such activity, the costlier it is to shareholders, who ultimately pay the commissions on all the trading.
When you evaluate a fund, look at its turnover ratio. You'll often see a stock fund's turnover ratio of 100% or more, but many great funds sport ratios that are much lower. Index funds, of course, will have drastically lower turnovers, since their holdings simply reflect the contents of a given index, which usually don't change too often. Large funds also tend to have lower turnover, as they're less nimble than their smaller counterparts.
In our Motley Fool Champion Funds newsletter service, editor/analyst Amanda Kish smiles approvingly at funds with not only low fees, but also low turnover. In a recent issue, for example, she recommended a fund with a turnover ratio of just 26% and an expense ratio of 0.67%. With investments in JPMorgan Chase
Some good ideas
Finally, keep in mind that you may be able to get cheaper fees if you have a lot of money to invest. With load funds, you can often get what amounts to a volume discount.
Another good place to find above-average funds is via a trustworthy mutual fund recommendation service. Permit me to offer an admittedly not-unbiased recommendation. One place to find some terrific ideas is the previously mentioned Motley Fool Champion Funds newsletter. Try it for a month and see which funds Amanda has recommended -- and why. She also maintains three easy-to-follow model portfolios, listing appropriate funds for conservative, moderate, and aggressive investors.
A free trial subscription will also give you:
- Full access to all past issues, so you can read about each recommendation in detail.
- Access to special reports.
- The ability to read and participate on the service's private discussion boards, where you can interact with Amanda and other mutual fund fans.
For more on mutual funds, read about:
This article was originally published on May 31, 2006. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. JPMorgan Chase and Johnson & Johnson are Motley Fool Income Investor picks. Marsh & McLennan Companies is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool is Fools writing for Fools.
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