If you are looking at mutual funds as an investment platform you might talk to friends or family that you think are savvy in the investment field. They will usually tell you to just review the mutual fund performance over the last ten years, with a minimum of three years. The advice should be taken into consideration and should be part of the selection process, but the real answer relates to the actual cost of the mutual fund. The true key is using a mutual fund expense ratios trick.
There are actually three types of mutual funds: One hundred percent no load means that there are no commissions or fees associated with the investment, at all. A no load mutual fund may have a management, distribution or investment advisory fee. These are known as 12b-1 fees. And then there are the load mutual funds that can have an upfront expense or a back end expense. The back end expense is usually deducted after a three year duration.
There are costs associated with each of the three types of mutual funds. Even the one hundred percent no load mutual fund has an associated expense. Typically it can be a riskier investment or lower interest rate.
You can easily use the mutual fund expense ratios trick with a simple calculator. In today’s market, many of the load and no load funds are being offered at the same interest rate. However, there are some load mutual funds that are still the cream of the crop and have a higher interest rate. To configure what is the best choice for your investment you will need to know all of the costs involved. Take the initial investment dollar amount; deduct the upfront fees (if any) on each. Then multiply times the interest rate. Deduct any annual management, distribution or investment advisory fee (if any) and extrapolate this out for a minimum of three years. Remember to deduct the back end fee on the third year. Look at the total increase of the investment, once these amounts have been deducted. Those amounts are the actual expenses of owning a mutual fund.
If you are looking at a high end mutual fund with an expense ratio of 1.0% or more, this is a pricey investment. The rule of thumb for expense ratios should be .25 percent or lower. This will include some of the best investment options.
Your main concern when considering investments in mutual funds is the bottom line expense. If you are confused by the numbers or they look more like smoke and mirrors than a clear picture, you may want to talk to an investment counselor as an initial step to get you on the right track. You will also be able to follow the trail of the best investments on a daily basis. Keeping in mind that the overall total expense costs are the key to the best investment for you.
Something that might be a clue as to what to stay away from? The high costs of advertising. If you are seeing a fund that you were considering on television, radio and in magazine advertising, you may want to back away from it. This increases the cost of the investment and that comes right out of your pocket.
