Low-cost mutual funds can make a huge difference in your investments. Over time, even seemingly small 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. Atop that, you'll also sacrifice more than $2,800 in 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.
Cheap funds ahoy!
If you're shopping for lower fees from your funds, try these bargain opportunities:
- Index funds. Though some index funds are inexplicably costly, many are dirt cheap. The Vanguard Total Market ETF's (NYSE: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 dividend yield recently around 2.6%, and top holdings that include Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), and Wal-Mart (NYSE:WMT), Vanguard's offering is 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 as much as 8.5% every time you buy shares? (In fairness, a handful of load funds may still be worth your investment -- especially if those loads are on the low side. And many no-load funds can be stinkers, levying 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. Going too far to reduce your costs here can backfire on you.
- Big purchases. You may be able to score cheaper fees by investing large amounts all at once, especially in a load fund.
The trouble with turnover
Fees aren't a fund's only performance-killers. A mutual fund's turnover rate reflects how much buying and selling it does. The more it trades, the costlier a fund is to shareholders, who ultimately pay the commissions -- and the taxes -- on all its trading.
You'll often see stock funds sport turnover ratios of 100% or more, but many great funds carry far lower turnover. Index funds, of course, will have drastically low turnover, since their holdings simply reflect the rarely changing contents of a given index. Large funds also tend to have lower turnover, since they're less nimble than their smaller counterparts.
In our Motley Fool Champion Funds newsletter service, editor/analyst Amanda Kish favors funds that boast low fees and scant turnover. One of her recent recommendations had a turnover ratio of just 18%, and an expense ratio of 1.04%. With investments in Denbury Resources (NYSE:DNR), Southwestern Energy (NYSE:SWN), and Micros Systems (NASDAQ:MCRS), this fund has great potential in today's market.
Keep your money to yourself
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