Last week's question
I was started in an Iowa farmhouse in 1985 by a ponytail-wearing guy who'd borrowed $10,000 from his grandmother. Today I'm a billion-dollar company, employing more than 10,000 people and raking in some $6 billion annually. In 1995, I was the first manufacturer to offer online ordering for my kind of product. I'm a "personal technology company," offering consumers, businesses and government agencies digital music, photography and video services, as well as high-speed Internet connections and networking for the home and office, among other things. I'm known for my bovine design, too. Who am I? (Answer: Gateway)
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Mutual fund fees
You probably know that mutual funds charge fees. But if you're like most people, you don't fully understand what the fees are for and what's reasonable. So let's run through some common mutual fund expenses.
- Loads: These are simply sales charges -- commissions paid to the brokers who sell funds. Some funds have them, and others don't. Many load fees are as high as 5.75 percent, and sometimes more. In a fund with a front-end load of 5 percent, if you deposit $10,000, you'll immediately lose $500. Ouch.
- Expense ratio: This number reflects what percentage of a fund's assets are deducted each year, typically to cover normal operating expenses. The median expense ratio for all funds is roughly 1 percent, but some funds charge as much as 5 percent or 10 percent, or more. (Really!) The following two fees are included in the expense ratio.
- 12b-1 fee: This is essentially a marketing fee, covering the fund's advertising and more. So fund shareholders are paying to attract additional money to the fund. This is ironic, because when funds grow too large, their performance can suffer. 12b-1 fees are often 0.25 percent, but can be as high as 1 percent.
- Management fee: This fee compensates the fund's management -- regardless of their performance. And oddly enough, while you might expect the percentage of this fee to drop as a fund grows in size, that doesn't always happen.
These fees all add up and make it hard for a fund to outperform the market average. That's why index funds are the best bet for many, if not most, investors. Vanguard's S&P; 500 index fund, for example, sports an expense ratio of just 0.18 percent. Its Total Stock Market index fund, which tracks the broader stock market, has an expense ratio of 0.20.
While you can't know how much a fund will earn for you in a given year, you can tell how much it will be charging you. Learn more about funds at www.fool.com/school.htm and www.morningstar.com. Many mutual fund companies, such as Vanguard, also have informative Web sites.