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
Keep your money to yourself
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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. The Motley Fool is Fools writing for Fools.