Tuesday, December 6, 2011

Getting The Most Out Of Mutual Funds

By Leo Pierson

Let's talk about mutual funds. A lot of us own them because they are convenient and offer us a measure of instant diversification. But mutual funds can have a dark side.

The high fee's that some mutual funds charge can seriously hinder your investment performance. Some of these fees are obvious while others are not quite so transparent.

Beware of mutual funds that charge "loads". A load is a fee that you are charged to buy or sell a mutual fund. You can either be charged a front-end load when you buy a fund or a deferred load when you sell the fund. Some loads can cost you up to 5% of your purchase price! Know that there are plenty of no-load funds out there to choose from so be sure to look carefully.

You also want to be sure and check what the expense ratio is on any mutual fund you buy. The expense ratio is the annual fee that you pay to own the fund. Think of it this way. If a mutual fund has an expense ratio of 2% then that fund needs to outperform the market by 2% just so you, the investor, can get a return that matches the market. Look for mutual funds that have expense ratios of less than 1% and lower is always better.

One last fee that is worth taking a look at is the 12b-1 fee. The 12b-1 fee is essentially the mutual fund passing along its marketing expenses to its investors. The money collected from this fee will be used to find new investors for the fund. This fee is included in the expense ratio number, so if you are happy with the expense ratio and don't mind chipping in for the marketing efforts of the mutual fund, then you can ignore this fee. But, if you would rather not pay for the mutual fund to market itself then you should look for funds that have no or very low 12b-1 fees.

Mutual funds can be great investment vehicles. Just be sure to do your homework so that you are giving yourself the best chance of achieving good performance.

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