What determines “best mutual funds” exactly, anyway? Funds are by far the internationally most commonly used investment vehicle. Now there are more mutual funds in the US market than there are stocks. With more than 26,000 funds Morningstar keeps track of, how does anyone know where to find the right ones?Learn more by visiting equitieslab.com/funds-vs-investing/
You have come to the right place to learn!
You’ll have to read my suggested list of “Best Mutual Funds for 2009” all the way to the end of this post. But let’s back up and do a little mutual fund 101 before we jump into that.
What makes a mutual fund? A mutual fund is today regarded as the most common form of a pooled invest. They are built for people who want skilled management of their money at reasonably affordable cost. They offer an investor comfort, diversification, record keeping, tax reporting, and securities safekeeping, in addition to competent management.
How can we make money from the mutual funds? Mutual funds make many ways of making profits. The key way to do this is by internal payments which are called cost ratios. Expenditure ratio sounds slightly better than FEES, right? But the same is real. It’s a fraction of the fund assets taken out every day, and that’s how the mutual fund company remains in operation. You never see these payments coming out, but they sure have an impact on your tax returns. You want to try to ensure that the spending levels are around 1 per cent or less a year. Few specialty funds can be higher, but most of the time you should aim to buy funds below 1 per cent. Funds are required by law to create a paper called a prospectus that is never read by anyone, and will give you valuable details about the fund. Luckily Morningstar is covering much of the same information in a much simpler way to understand. The best mutual funds would reduce those internal costs.
What’s up with commissions? This is a major one. Many mutual funds offered by bank brokers today and full-cost brokers such as Merrill Lynch and Edward Jones have commissions, or hundreds. Loaded commissions on funds can differ, but the majority are between 1% and 5.75%. That means it might come out for a fee to the broker for every $1000 you invest, $45 to $57.50 and the rest gets invested in your account. That’s not such a bad thing if the broker is really being paid to help you handle your mutual funds portfolio. Laden funds may have fees on either the front end or back end. Front-end means you’ll pay it with fresh money when you go into the company, these are considered A share funds. Back-end means you pay it when the shares are finally sold, these are called B share funds. The backend commission steadily declines with a B share the longer you keep it. Typically after 7 years it’s gone entirely. The problem is that B share funds have much higher internal spending rates, often 2.5% per annum. That is how they pay for the fee they paid to the dealer when you ordered it. If you are buying a loaded fund you should NOT purchase a B share. Another choice is a share in C. When you buy it, C share funds don’t have a fee and a back-end profit of 1 per cent if you sell within the first year. It would have little to no fee on the best mutual funds.
What are Fees 12b-1? These are another form of internal fee you’ll never see coming out of, but you need to be aware of that. Many loaded funds have 12b-1 fees and a handful of no-load funds do as well. This are simply an annual trailing fee that goes to the broker who has sold the fund to you. It should be his or her motivation to carry on taking care of your account. It’s usually .25 percent a year, so it won’t break you down. But then you add that to a 5.75 percent up front fee and a 1.50 percent to 2.5 percent cost ratio, then it’s starting to get really hard to keep up with the demand. If you are searching for the right mutual funds, consider avoiding the fees for 12b-1.
Which funds are No-Load? No load funds are funds that have absolutely no fee for the investor to pay. So any $1 you spend is going straight into the fund. Some well-known no-load mutual fund firms are Fidelity Investments, Vanguard and the Dimensional Fund. The only way a joint no-load fund can make money is from the internal cost ratios. But that doesn’t mean they have higher cost rates. Indeed, it can be quite the contrary. No-load funds are among the best mutual funds available today in our opinion.