In your search for the best no-load mutual fund, some investors select mutual funds based solely on their fees and expense ratios. The rationale is that investors can invest more of their capital by choosing low-fee mutual funds. Also, no-load mutual funds with low expense ratios will pass on more of the returns they earn to their shareholders. However, metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used proxy for the U.S. stock market, are hardly at bargain levels. Several market experts forecast single-digit annual returns for domestic mutual funds over the next decade.
Is shopping for the lowest fees and expense ratios the right way to select mutual funds? Only sometimes. The answer depends on the type of mutual fund you are evaluating, the time you can devote to evaluating and managing your mutual funds’ investments, and the cost incurred.
Investing in the Best No Load Index Mutual Funds.
If you believe markets are generally efficient and prefer to invest in an index mutual fund to achieve an index-like return, shopping for the best index mutual fund based on low fees and a low expense ratio makes perfect sense. An index mutual fund’s portfolio manager seeks to invest the fund’s assets to track an index as closely and cost-effectively as possible. Larger index funds have an advantage since they can spread their operating costs over a larger asset base. Some of the interesting index mutual fund options currently available include no-load index mutual funds like Schwab S&P 500 Index Fund (Nasdaq: SWPPX), Fidelity 500 Index Fund (Nasdaq: FXAIX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios of 0.02%, 0.01%, and 0.01%, respectively.
Investing in Actively Managed Mutual Funds and Strategies.
If you believe portfolio managers can add value and outperform the index through active management, fees, and expenses are just one of several important factors to consider. The portfolio manager’s ability and investing style are just as important. Therefore, there may be better approaches than seeking the best mutual fund based on low fees and expense ratios.
Ensuring Your Mutual Fund Puts Your Interest First.
Whether you prefer to index or actively manage your investments, ensuring that your mutual fund is putting your interests first is good investing practice. Mutual funds charge different types of fees. By looking at some key factors concerning fees, you can see whether the mutual fund puts your interests first or merely seeks to line the mutual fund company’s pockets.
Serving the Interests of Long-Term Shareholders – Some mutual funds impose short-term trading fees to discourage frequent trading of mutual fund shares. Frequent trading disrupts the efficient management of the mutual fund and increases operating expenses. A short-term trading fee can benefit long-term shareholders if the mutual fund company rightly treats the fee.
Passing on Savings from Scale Economies – The operating expenses incurred by a mutual fund are a combination of fixed and variable costs. As the assets of a mutual fund increase, the fixed cost gets spread over a larger asset base. Therefore, the expenses incurred to operate the mutual fund as a percentage of the fund’s assets should trend lower. In line with this theory, it is also wise to seek out a mutual fund with a low asset turnover rate; this means that the fund rarely trades or sells assets from the fund’s portfolio.
A mutual fund that places the interest of shareholders first must pass on the savings from scale economies to shareholders. Therefore, the trend in a mutual fund’s expense ratio measures how seriously a fund takes its fiduciary responsibility.
If you need assistance with your investments or are looking for a good no-load mutual fund, Kiplinger publishes several lists of top mutual funds. If you are in the Metro Nashville area and looking for a Registered Financial Consultant (RFC), don’t hesitate to contact me. For those outside the middle Tennessee area or who prefer an RFC near them, seek out a qualified fee-only financial planner near you.
