Rule Number One for mutual fund investors is to buy inexpensive funds. Most investors are very cost-conscious when it comes to buying a TV set or a computer but not when buying funds. The information is readily available, online or from a fund, and it’s worth finding out.
A few years ago, when funds were returning 20 percent a year, paying 2 percent in fund expenses might not have seemed worrisome. However, if we’re entering into a time when investment returns will be around 6 percent a year, as some people have suggested, paying 2 percent to a fund means giving up one-third of your gains. You’ll be much better off with a fund that charges you 1 percent, or even less.
How much can you expect to pay when you invest in funds? According to Morningstar Inc., Chicago, diversified stock funds have average expense ratios around 1.5 percent: for every $10,000 you invest you’ll pay management fees of about $150 per year. International and specialty stock funds have slightly higher expenses while most bond funds charge investors approximately 1 percent per year.
Those are the averages; many funds have lower expenses. Investors should look at a fund’s turnover before investing. A fund that reduces its trading costs also lowers its overall costs. Morningstar puts the average turnover rate for a domestic stock fund at about 100 percent (the average fund’s annual trades are about equal to the assets it holds) so funds with much lower turnover rates may have relatively low costs.
