If you don’t cut costs to save money, investing in mutual funds can be expensive. You could end up giving back one-third of your profits. Here are four ways to save money investing and boost mutual fund profits significantly.
If you hook up with the wrong funds or wrong financial planner it could cost you over 3% a year to invest in mutual funds. Once you learn to save money investing in mutual funds you’re way ahead of the game. Let me put this into perspective. Over the long term stock funds have returned about 9% to 10% a year, and bond funds have returned closer to 5% to 6%. Why give up about one-third of your profits to charges, expenses, and fees?
The first way to save money investing in mutual funds is to avoid sales charges or “loads”. These can cost you 5% up front off the top, or up to 2% a year. If you invest through a middleman like most folks do, you are likely paying these sales charges. If you invest directly with a major no-load fund company (family) you avoid them altogether. Get on the internet and search for “no-load funds”.
Second, invest in funds with low yearly expenses. Every fund charges for expenses on an ongoing basis every year, and this cost is shown in the fund’s “expense ratio”. Some funds take more than 2% from your account each year, while others take less than ½%. Many stock funds have an expense ratio of about 1.5%, which means that it costs that much just to own the fund for the year. Look at the expense ratio before you invest.
Third, avoid extra “service fees” that are charged when you do business through some financial planners or sales representatives. These often amount to an extra 1.5% a year on top of any other costs you are paying. Good service is available for free with the major no-load fund companies.
Fourth, to really save money investing in mutual funds go with INDEX funds for both stock and bond funds. These funds simply track the performance of a stock or bond index, which cuts management costs and expenses to the bone. While other funds charge for active management in an effort to beat the indexes, few succeed on a consistent basis. In fact, many of them do worse than the index that serves as their benchmark. Index funds have the lowest expenses and can cost less than ½% a year to own, period.
Now let’s put it all together. Here’s how to save money investing in mutual funds to increase profits. Invest in no-load funds, directly through a no-load fund company. Invest in funds with expense ratios of 1% or less. Go with index funds whenever possible to lower your cost of investing even more.
Three major no-load fund companies are Vanguard, Fidelity and T Rowe Price. Two of these are also the largest two mutual fund companies in America. You can pay more than 3% a year to invest in mutual funds and give back about one-third of your profits. Or you can save money and pay less than ½% a year to invest. Over the years the difference can add up to thousands of dollars.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.