“Are You Paying Too Much For Your Mutual Fund?”
9/10/06
All mutual funds charge internal, ongoing management fees. These fees are used to pay fund managers, analysts, brokerage and marketing fees, administrative costs, and, in the case of load funds, commissions to the salespeople. The good news is that fees, on average, are lower than 15 years ago, but only marginally. The bad news is that they are still higher than they should be, in many cases.
Obviously, as an investor, you don’t want to be victimized by a fund’s high fees and a poor performance. To help you make smarter decisions, I have devised a simple test you can perform to make certain you’re getting a good value for your invested dollars.
Step 1. Retrieve your most recent investment statement listing all of the mutual funds you currently own.
Step 2. Begin by listing each fund you own on a sheet of paper and add three columns.
Step 3. In the first column, write down the asset class of each fund using one of four broad categories: Domestic Stock, International Stock, Taxable Bond, Municipal Bond. If you are not certain, go to the Fund section of www.morningstar.com and type in the name of your fund. You should have no trouble identifying its asset class category.
Step 4. While you are in Morningstar.com, look up the expense ratio of your fund, and write this figure in column 2 of your worksheet.
Step 5. Under the ‘Total Returns’ section of Morningstar.com for your fund, find the ‘Trailing Total Returns’ section for your fund and write it in column 3 the ranking for 3 and 5 years. The lower the number here, the better. For example, a ‘25′ under the 3-year Trailing Return indicates that your fund has performed in the top 25 percentile of all funds in its category.
Once you have finished assembling this data for each fund you own, you are ready to do a quick evaluation. First, compare each of your funds’ expense ratio to the industry average listed here:
Domestic Stock: 0.93
International Stock: 1.10
Taxable Bond: 0.85
Municipal Bond: 0.74
Source: Morningstar
Are your funds’ expense ratios higher than the industry average?
Next, look at the Trailing Total Returns for each of your funds. Are the Trailing Total Returns higher than 50? If so, this indicates that your fund’s performance over a long time period is in the bottom half of its category. Furthermore, if its expense ratio is above average, you may very well be paying too much while receiving poor performance to boot. If you’re in this situation, you should consider if you should switch to a fund that has below average expenses and above average three and five year returns. A good place to start your search is at fund companies such as Vanguard, Dodge & Cox and Fidelity which all offer low cost no-load funds. For load funds, the run-a-way leader is American Funds.