How to Avoid Mutual Fund Fees

Mutual funds are great simple long term investments which allow you to diversify your holdings and gain solid returns. They are certainly not without their critics though. Some people claim that they charge excessive fees and some question whether or not the rates of return are what they claim to be. Fortunately most of the complaints brought forth by those who would bash mutual funds can easily be avoided with some basic planning. By choosing wisely, you can select a mutual fund where the fees are extremely low, and much lower than some of the alternative investments on the market.

Turnover - This is when the mutual fund buys and sells stocks and other investments inside the fun. There are some inherent cost associated with turnover that are charged as brokerage fees, but the holder will also be subject to capital gains if any of the investments sold had made money. You can avoid turnover costs and associated capital gains taxes by investing in mutual funds with very low turnover rates, such as index funds. You can avoid capital gains taxes all together if you place the money inside of a retirement account such as a 401k Plan or a Roth IRA

Management Fees - If you look at the expense ratio of your mutual fund, this will tell you how much you are paying in fees. If your expense ratio is 0.20, this means that 0.20 of your investment will be given to the brokerage as their fee each year. If you had $1,000 invested, you would be giving $2 a year for your money to be invested in that fund. These fees pay for the people that manage the fund as well as the overhead of simply running the fund.

You can avoid most management fees by choosing mutual funds that are passively managed, such as index funds. They tend to require very little management and thus have very low expense ratios. There's no hard and fast rule for what makes a "too high" expense ratio, but the lower that you can find, the better.

12b-1 and Other Service Fees - Sometimes investment companies charge for things such as advertising, accounting work, legal fees, registration fees and the like. You can easily avoid these fees by dealing with a discount brokerage such as E*Trade, or by dealing with the mutual fund manager directly themselves, such as Vanguard.

There are certainly some mutual funds that are a lot better than others when it comes to fees. The track record of the investment is certainly the first thing that you should look at, but fees are a close second.