Best No Load Mutual Funds The Right Way to Look at Fees and Expenses

Parameters such as price / earnings ratio and dividend yield on the S & P 500 index, a commonly used proxy for the 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 the next decade.

While pursuing the search for the best mutual fund, some mutual fund investors tend to focus exclusively on fees and cost ratios. The rationale is that by choosing funds with low fees, investors will have more of their capital invested. Also, no load mutual funds with low expenses ratios disclose more of the returns they earn to their shareholders.

Is shopping for the lowest fees and expense ratios a smart way to select mutual fund? Not always. The answer depends on the type of mutual fund you are evaluating, the time you can use to evaluate and manage your mutual funds investments, and the types of costs.

Investing in the Best No Load Index Mutual Funds.

If you believe that markets are generally efficient and prefer to invest in an index mutual fund to achieve an index-like return, shopping for the best index mutual fund based on low fees and low expense ratio makes sense. Portfolio manager of an index mutual fund endeavors to invest the fund's assets to track the 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 the interesting index mutual fund options currently available include no load index mutual funds, as 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 investment 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 perform the index through active management. Portfolio manager's ability and investing style are just as important. Therefore, to find the best mutual fund based on just low fees and low expense ratio may not always be the right approach. It may just be a matter of being "penny-wise and pound-foolish."

Legendary investor Peter Lynch, who managed the Fidelity Magellan Fund (Nasdaq: FMAGX) from 1977 to 1990, achieved returns well above market averages even after accounting for the 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 achieved compound annual return of 18.6% for the 10 years ending in 2004, well over 12.0% of Vanguard 500 Index fund.

Alpha Profit, 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 FocusTM model portfolios. Although not the lowest expense ratio compares the no-load Fidelity Select Funds favorably with other sector fund offerings. Alpha Profit prefers Fidelity Selects for their comprehensive coverage of sectors and industry groups. The Alpha Profit model portfolios have significantly outperformed the market average over time.

Ensure that your Mutual Fund puts your interests first.

Whether you prefer to index or take an active approach to managing your investments, ensuring that your investment is to put your interests first is good investing practice.

Mutual funds employ different types of fees. By looking at some key factors pertaining to fees, you can get a sense of whether the mutual fund puts your interests first, or just want to adjust the mutual fund company's pockets.

Serving the interests of Long-Term Shareholders.

Some mutual funds impose short-term trading fees to discourage frequent trading of fund shares. Frequent trading disturbs efficient management of the mutual fund and increases operating costs. A short-term trading fee can therefore actually be beneficial for long-term shareholders if the fee is rightly regarded as the mutual fund company.

Fidelity Spartan Total Market Index Fund (Nasdaq: FSTMX), for example, follows the practice of returning short-term trading fees on shares held less than 90 days to the mutual fund itself rather than passing it to the benefit of the mutual fund company. By having this short-term trading fee structure, search no load mutual fund to contain its operating expenses. Such fees are therefore in line with the interests of long-term shareholders of this mutual fund.

Pass on savings from economies of scale.

Operating costs incurred by a mutual fund is a combination of fixed and variable costs. As active in a mutual fund increases, the fixed costs are spread over a larger asset base. Therefore, the cost to operate the mutual fund as a percentage of the fund's assets should trend lower.

A mutual fund that places the interest of shareholders first must pass on the savings from economies of scale to shareholders. The trend in a mutual fund's expense ratio therefore serves as a measure of how seriously a fund takes its fiduciary responsibilities.

Key points.

1. If you are looking for the best no load index mutual fund, shopping for one with low fees and expenses makes perfect sense.

2. If active management of investments appeals to you, fees and costs is just one of several important factors to consider.

Ability and investing style of the portfolio manager is at least as important as fees.

3. The types of fees a mutual fund fees and how the Fund user fees provides clues to how seriously a fund takes its fiduciary responsibilities. Mutual funds that impose fees to contain operating expenses and return fees of the mutual fund help protect the long-term interests of shareholders.

4. Mutual funds that puts shareholders' interests first pass on the savings from economies of scale to shareholders.