How to Pick Low-Cost Funds

How to Pick Low-Cost Funds

There are some 4,000 mutual funds out there, more than 30 times the number available three dozen years ago. Yet the annual cost of running the funds hasn’t fallen much. For some stock funds, fees actually have increased. Fund expenses matter: Fees charged by mutual funds get taken out of the investor’s pocket before any returns are paid out. When funds do poorly, expenses worsen a fund’s losses. Studies show that, although investors sometimes do well even with high-expense funds, your odds of gaining better returns improve when you invest in lower-cost funds.

How do you pock funds with low fees? The annual fund expenses include the following: fees paid to the fund’s adviser, costs of accounting, shareholder and annual reports, phone representatives, advertising, payments to custodians, the institutions that hold the fund’s securities.

Should low-cost fees be the main reason you choose a mutual fund? Hardly. Fund advisers say the most important factor is to decide what type of fund – aggressive growth, diversified foreign, corporate bond, etc. – you want to invest in and the degree of risk involved. Only after deciding on funds that reflect your goals should you compare fund costs.

This table shows approximate annual fund expenses as a percentage of assets for various stock types:

Diversified U.S. Stock Funds – 1.30%

Aggressive growth – 1.70%

Equity income – 1.25%

Growth 1.30%

Growth and income – 1.2%

Small company – 1.4%

International stock funds – 1.8%

Diversified foreign – 1.6%

Europe – 1.9%

Pacific – 1.8%

Bond funds

Corporate bonds – -.85%

Government bonds – 0.9%

Municipal bonds – 0.75%