How to Stop Paying High Mutual Fund Fees

The lure of mutual funds is twofold. When you buy mutual fund shares you get an instantly diversified portfolio of securities and professional management of your funds. But all that diversity and professional money management comes at a price. All mutual fund investments involve fees ranging from sales charges to management fees that can reduce your return on investment. You might have to pay the piper, but there are ways to pay less.

Load vs. No Load

The first fee you might encounter with mutual funds is when you purchase your shares. Some funds, commonly referred to as loaded funds, have a sales charge that they take off the top of your investment. The load could be as high as 8.5 percent. If you invest $10,000 in a loaded fund with an 8.5 percent sales charge, only $9,150 dollars goes to purchase mutual fund shares. You can avoid this initial cost by purchasing a comparable no-load fund. No-load funds don't have a sales charge, so 100 percent of your money goes to buying fund shares.

Break Points

If you really like a particular loaded fund, you might still be able to reduce the amount you pay in sales charges by taking advantage of break points. Break points are levels of investments that reduce your sales charge. You might get charged 8.5 percent on investments of less than $10,000 but the charge might drop to 7 percent once your investment reaches the $10,000 break point. It might drop to 6 percent once you reach $25,000. Break points might be cumulative over a period of time, for example one year. If your total investment exceeds a break point during that time frame, your entire investment receives the lower sales charge. There's no requirement for a mutual fund to offer break points, and not all do, so it pays to check before you make your initial investment.

Active Vs. Passive Management

Most mutual funds are actively managed. The fund's manager or management team is tasked with actively managing the fund's assets in an attempt to achieve the fund's investment objectives. Some funds are passively managed, using a specific benchmark or index, such as the S&P; 500, to dictate the composition of the securities it holds. Because passively managed funds only seek to mirror the benchmark's composition, they typically generate significantly lower transaction and management fees than actively managed funds.

Buy Local and Large

There are plenty of reasons to invest globally. We live in a global economy, and many products that are household names in the U.S. are produced by international companies. International economies might also offer better returns when the U.S. economy is tanking. Small companies might offer greater opportunities for growth than large, well-established mature companies. But the mutual fund fees associated with international and small-cap investing are significantly higher than funds that focus on large-cap domestic stocks. All other factors being equal, the fund with the lower fees will produce a greater return on your investment.

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About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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