When searching for
best no load mutual funds, some mutual fund investors often tend to focus exclusively on mutual fund fees and expense ratios. Is this always a smart way to select mutual funds?Metrics such as price/earnings ratio and dividend yield on S&P 500 index, a commonly used proxy for U.S. stock market, are hardly at bargain levels. This has lead several market pundits to predict single digit annual returns for domestic mutual funds over next decade.
While pursuing search for best mutual fund, some mutual fund investors tend to focus exclusively on fees and expense ratios. The rationale is that by choosing mutual funds with low fees, investors will have more of their capital invested. Also, no load mutual funds with low expense ratios will pass on more of returns they earn to their shareholders.
Is shopping for lowest fees and expense ratios a smart way to select mutual funds? Not always. The answer depends on type of mutual fund you are evaluating, time you can devote to evaluating and managing your mutual funds investments, and type of cost incurred.
Investing in 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 best index mutual fund based on low fees and a low expense ratio makes good sense. The portfolio manager of an index mutual fund endeavors to invest fund’s assets to track index as closely and cost-effectively as possible. Larger index funds have an advantage in that they can spread their operating costs over a larger asset base.
Some of interesting index mutual fund options currently available include no load index mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index Fund (Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios of 0.09%, 0.10%, and 0.18%, respectively.
Investing in Actively Managed Mutual Funds and Strategies.
Mutual fund fees and expenses are just one of several important factors to consider if you believe portfolio managers can add value and out-perform index through active management. The portfolio manager’s ability and investing style are just as important. Therefore, seeking out best mutual fund based on just low fees and a low expense ratio may not always be right approach. It may just be a case of being ‘penny-wise and pound-foolish’.
Legendary investor Peter Lynch, who managed Fidelity Magellan Fund (Nasdaq: FMAGX) from 1977 to 1990, achieved returns well in excess of market averages even after accounting for fund’s fees and expenses.
So too has Bill Miller who currently manages Legg Mason Value Trust (Nasdaq: LMVTX). Even after accounting for its relatively high 1.7% expense ratio, this no load mutual fund has achieved compound annual returns of 18.6% for 10 year period ending in 2004, well in excess of 12.0% for Vanguard 500 Index mutual fund.
AlphaProfit, an investment research firm that specializes in active sector investing, uses no load Fidelity Select Funds to implement its investing strategy through its Core™ and Focus™ model portfolios. Although not lowest, expense ratio of no load Fidelity Select Funds compares favorably with that of other sector fund offerings. AlphaProfit prefers Fidelity Selects for their comprehensive coverage of sectors and industry groups. The AlphaProfit model portfolios have significantly outperformed market averages over time.
Ensuring Your Mutual Fund Puts Your Interest First.
Whether you prefer to index or take an active approach to managing 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 pertaining to fees, you can get a sense of whether mutual fund puts your interests first or merely seeks to line mutual fund company’s pockets.
