How to compare mutual funds
Q. What is a fair fee to pay for a mutual fund? Is there a way to compare?
A. All mutual funds will charge some kind of management fee. And yes, some are significantly higher than others.
But what’s fair — or reasonable?
The fees charged to manage a mutual fund are based mostly on the underlying market the mutual fund participates in and the nature of the fund management, said Brian Kazanchy, a certified financial planner with RegentAtlantic in Morristown.
He said most mutual funds have various shares classes.
“This means there is more than one version of the same fund and the difference between the funds is the expenses they charge,” he said.
All funds have an underlying management expense ratio. Some funds may also build in sales charges — called “loads” — and even marketing fees.
Kazanchy said investors should avoid funds that charge sales charges and marketing charges because there are plenty of great funds to consider that do not have these additional fees.
“Besides no-load retail funds, if you are working with a financial advisor you may be able to access institutional class shares that have lower management expense ratios than the retail version of the same fund,” he said.
You can get a quick read on how cheap or expensive a mutual fund is by going towww.morningstar.com and typing in the fund symbol.
Kazanchy said Morningstar provides a fee level ranking for each fund broken down into quintiles — low, below average, average, above average and high. This ranking is based on what a fund charges relative to other funds that invest in the same asset class with similar distribution characteristics.
Morningstar also shows all the fees that the fund charges and when applicable, compares them to the median and average fees charged by all funds in their peer group, Kazanchy said.
For example, the average large-cap growth fund charges 1.14 percent, according to Morningstar. Because that’s the average, Kazanchy said, there are likely many good large-cap growth funds that charge less than that amount.
When you compare fees, be sure to compare apples to apples. For example, don’t compare the fees of an actively-managed international fund to a domestic index fund. That’s because funds with different strategies will have significantly different costs.
“Some general rules are that index funds tend to be much cheaper than actively managed funds,” he said. “Domestic funds tend to be cheaper than international funds. And large-cap stock funds tend to be cheaper than small-cap funds.”
He said that makes sense because it is more expensive to trade in international and small-cap stocks than U.S. large-caps.
But, he said, many actively managed funds tend to underperform index funds, and that may be directly tied to their higher fees.
“As the saying goes, fees are only an issue in the absence of value,” he said.
Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.