The world of mutual fund investing can appear complicated. An investor chooses among mutual funds with active or passive management that generally hold a combination of stocks, bonds, and possibly even other assets. As you evaluate mutual fund companies, make sure you compare the fees and commissions associated with specific fund to avoid paying too much.
Paying for Actively-Managed Mutual Funds
Mutual funds are available in different share classes. Most actively managed funds are issued as A-shares. These come with an up-front sales charge as high as 5.75%, so the investor who puts in $100 will own $94.25 worth of mutual funds. This is not the only fee a person will pay though. The ongoing internal expenses range from .1% to 1.5%. For those who are turned off at upfront sales charges, there are C-shares. These go in without a sales charge, but the investor can expect their internal expenses to increase by about 1%.
Reducing Mutual Fund Fees by Switching to Passively-Managed Mutual Funds
Index funds are an easy way to avoid sales charges and reduce mutual fund fees. Most of them are passive funds and are available without any up-front charges, and they have the lowest internal expenses of about .1%. The only downside is they are not actively managed, so the investor can count on their portfolio to perform just under the index.
Using a trusted mutual fund company, one with a great track record and low internal expenses, is another way. While the expenses are low, and the performance is better than average, these funds are still actively managed. This means they will have an up-front sales charge. The good news is, the more a person invests, the more breakpoints they will hit, reducing their charges.
Finding a discount brokerage will allow a person to pay the bare minimum in commissions on their stock purchases. Most of them only charge a flat rate for the trade, rather than a percentage of the trade. So for the investor who wants to deal with a number of individual issues, this is the way to go.
The bottom line is, no matter what a person does, they will pay something in fees. To avoid outrageous fees, or being taken advantage of by an unscrupulous advisor, they must do some research. Morningstar.com has a free service that will rank mutual funds, and list all their fees in an easy to read format. Spending a few minutes on this site before buying is wise for the do-it-yourself type. The other alternative is to hire an advisor who is known and trusted in the community.