Posted by Ryan on May 7th, 2008 in Investment Products

Mutual funds are a great way to invest in the market. Pick a couple mutual funds appropriately, and you have instant diversification and no investing skills or regular maintenance that is needed from your end.

About No Load Mutual Funds

Mutual funds don’t come without some expenses, and the ones you currently invest in can be eating all of your profits. As you review your portfolio and select new funds to stash your cash, it is important to consider the fees associated owning that mutual fund. And many times it is not so obvious.

The biggest expense to look out for is a load fee. These are fees you either pay on the front-end or the back-end of purchasing your fund. In other words, your broker automatically takes 5% out of your $10,000 capital before investing the money, or they take 5% when you go to sell your investment.

A load fee is simply an additional sales charge that is tacked on to the mutual fund expenses in order to pay your broker a commission. These charges can range from 2% to as much as 8% of your investment. Often though, a broker didn’t have to do any work to find you this great mutual fund. There’s a good chance you discovered and initiated the transaction, so why are you paying a broker fee?

Chances are that a fund with a load fee has a similar or identical fund without the load fee. So as you are searching for the ideal diversified mutual fund that meets your goals, double check that there is no load fee associated with the fund.

The other fee that you cannot escape is the expense ratio. This is simply a maintenance fee associated with every mutual fund, which is the cost to run the mutual fund. This goes to pay for advertising, general trading costs, etc. The average domestic mutual fund expense ratio is about 1.5%, so make sure you’re not overpaying for this fee.

In fact, studies show that over the long run, low-expense funds are more likely to outperform high-expense funds, so you may be better off shopping for the cheaper alternative.

If you are a real bargain hunter, index funds that mimic a stock index (such as the Dow Jones Industrial Average or the S&P 500) are the lowest-cost mutual funds. This is because these funds require very little active management. Because of their low cost nature, and the unlikelihood that the market can be beat, many professional advisers recommend having a no load mutual fund that mimics the S&P 500 included in your core portfolio.

To further reduce your no load mutual fund fees, open an online brokerage account that has no trading fees or expenses.

Millionaire Money Habit: While mutual funds are a great way to diversify your portfolio and have a passive investment approach, it is important to know how your money is being spent. Don’t overlook the fee structure and details or you will be wondering where your profits went. -RT

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