Sunday, November 16, 2008

Fund Fees To Look Out For

Most investors don't have the time to perform the due diligence on stocks that we often advocate. After all, most people's real jobs are outside of the investment world. As such, they leave most of the individual investment decisions to financial experts (e.g. mutual fund managers) who invest according to a specific risk profile. It's important, however, that investors pay special attention to the fees they are charged for this service. The types of fees that are charged by your fund can tell you a lot about how your fund is incented to operate.

If your fund charges an upfront commission or sales charge, keep in mind that the managers will spend a lot of marketing resources trying to sell the fund to new and old investors, since this is how they get paid. In addition, or instead, funds may also charge you a commission when you redeem your investment. This suggests that your fund has a longer-term focus, as they don't want to be subject to high churn rates.

While those two fees are not charged by all funds, all funds will charge annual expenses, usually as a percentage of the money you have invested. You can see a breakdown of this fee in your fund's prospectus. Some of this will be a distribution fee (again, this rewards the salespeople who sold it to you), a management fee (to attract and retain professional managers), and other expenses.

It's difficult to judge mutual funds on their performances alone, since past performances are not necessarily predictive of the future. By understanding a fund's fee structure, you can get a better idea of where your fund focuses its resources.

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