The Best Low-Fee Mutual Funds
Investing in mutual funds incurs fees and expenses. Fess are commonly referred to as shareholder fees that a fund charges shareholders on a individual basis, such as broker fees, purchase and redemption fees. Investors have certain control over such fees and may pay less if they can limit the number of their fund transactions. On the other hand, expenses are imposed on all investors on a annual basis out of fund assets. When investing in mutual funds, investors should be more concerned about the inevitable fund expenses than individual shareholder fees.
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Fund Management
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Mutual fund expenses are expressed in ratios, the percentage of expenses over the amount of fund assets. The level of a fund's expense ratio is directly tied to the management style of a fund. The more actively managed a fund is, the higher its expense ratio. Therefore, index mutual funds have the lowest expense ratios as they are passively managed, tracking the performance of a specific type of market. Over the long run, low risk, low-fee index funds tend to outperform expensive, actively managed mutual funds. Some brokerage firms offer the best low-fee index funds. The expense ratio of index funds from Fidelity is fixed at only 0.1 percent.
Fund Performance
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Fund expense ratios can cut into investment returns. A small differential in expense ratios could be a lot of money to gain or lose for fund investors over the life of a fund. In addition, a fund's annual expenses collectively reduce the asset base of a fund, weakening the power of investment compounding. The lower the fees a mutual fund charges, the better its total investment returns over time, all else being equal. Because the uncertainty of fund performances often increases with time, the best low-fee mutual funds are often those that can outperform over the long run.
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Fund Scope
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Funds can become large in scope with a wide range of diversification. More diversified funds often have higher expenses as fund managers must conduct extensive, costly research to invest in different asset classes across sectors and industries. Diversification is often aimed at smoothing out investment returns by eliminating risks but also giving up on certain rewards. Therefore, it is possible that an expensive, diversified fund may lose out to a more focused, low fee mutual fund. Use a mutual fund research site such as Morningstar or Lipper to check on the rankings of low-fee, focused funds. For example, the Yacktman Focused Fund with an expense ratio of 1.25 percent is among the best, ranking number one for total returns over three years, five years and ten years.
Fund Strategy
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Mutual funds with a simple investment theme such as growth or value not only can potentially boost investment returns but can also lower fund expenses as a single investment strategy demands less research and administrative support. Mutual funds may also distinguish themselves by investing in companies belonging to the same group of market capitalization such as large cap, mid cap, or small cap. Streamlined mutual funds with low-fees may outperform their counterparts of expensive, blend funds. To find the best low-fee mutual funds, investors can also look into mutual funds with a unblended investment strategy.
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