Understanding Mutual Fund Fees and Expenses

Mutual fund fees and expenses, they are something that we will always have to live with to a certain degree, but they are definitely something that can be controlled if you go about it in the right way when making your investments. Behind the scenes there is certainly a large amount of work that is being done at the mutual fund company to try to bring you the best results, so it is very natural that there would be some fees associated. As an investor, you balance understanding that the mutual fund will have some fees and expenses with the fact that you should not allow those fees and expenses to hold your investment portfolio back.

The first thing you absolutely must do is avoid all mutual funds that have a load of any kind. While management fees for research and salaries are certainly necessary, loads are not necessary at all. Simply put you do not have to put up with mutual funds that have loads associated with them. Loads are a thing of the past in the mutual fund industry and the only people they help out are the financial advisors who are getting something for selling that particular mutual fund. You want to line your own pockets, not the pockets of a financial professional.

Understand that depending on what kind of mutual fund you are buying you will pay a different amount of annual fees and expenses. For example, the cheapest types of mutual funds are index funds since those don't require any research on the part of the firm. Often the most expensive funds are international funds or small cap mutual funds. Small caps have higher fees because they are the most difficult to research for the mutual fund family and it takes more expenses on their end to to do a good job finding the winners.

Another thing to keep in mind when understanding how much the fees and expenses of a certain mutual fund are going to be is how active the management will be in managing the portfolio. If management is churning stocks constantly you are likely to have a much higher expense ratio than if the management has a very low turnover in its portfolio.

As investors you should be willing to pay reasonable mutual fund fees to get good results, but loads and fees that contribute to constant advertising are things you should avoid. A solid mutual fund should be able to rest on its laurels and it won't need to spend a fortune telling people about how great it is.

Mutual fund fees and expenses are part of life, but managing how much they eat into your portfolio is absolutely necessary to build a nice nest egg over time.