Every now and again, I wonder if I’m writing at either a level that is too personal. One one hand, I believe that some of the reason people ready Lazy Man and Money is because of the personal focus. On the other hand, even I have to admit that my life isn’t that exciting. It feels like I’m walking a fine line sometimes.

I’ve also been wondering if I’ve presumed too much financial knowledge of my readers. I was looking through some of my old posts and I realized that I have no “mutual fund” category. I couldn’t believe that in over 5 and half years of personal finance posts I haven’t written one post around mutual funds. It doesn’t feel like it can be true, but unless I miscategorized a bunch of posts (which is always possible), it is. It’s a little like teaching someone the fundamentals of quartberbacking in the NFL and excluding the screen pass.

I think the reason why I haven’t touched on mutual funds in the past is that I focus most of my investing in exchange traded funds (ETFs). In many ways, they are like mutual funds, but they are traded on stock exchanges, and in many cases, but not all, have lower fees. Also, they are relatively easy to understand. You typically pay a broker commission (usually under $10) to buy the ETF. The rest of the fees are built into the stock price and you can look up the expense ratio information for that. That’s information for another article. Today I’d like to talk about mutual fund fees…. particularly understanding and avoiding them. It’s time to cover some of the basics. Please bare with me, I’m not in the financial industry and I may gloss over minor details.

One of the differences with mutual funds is that the terminology is a little more difficult – at least for me. For example, you have load and no-load funds. A load in the mutual fund context is another word for fee. Typically, there are front-end loads, which means that you pay when you buy the fund. Sometimes they are just a percent or two, but when you are investing $10,000 (as in rolling over a 401K to an IRA) that translates to “just” a $100 or $200. It’s not so minor a detail now is it? Additionally some mutual funds charge back-end loads, or to make it more confusing, something that is often called a deferred sales load. These are fees that are charged will you sell the mutual fund. Sometimes if you hold the fund long enough, the fees are waived.

If that last paragraph was confusing, you can simply do what I do, look for mutual funds that are marked “No-load.” There are a lot of them available. Since basic index funds (an automated average of a large group of funds) typically outperform a majority of mutual funds, I really don’t believe in investing in any mutual funds that charge a load.

Just because you’ve avoided paying a load doesn’t mean that you’ve escaped paying fees. The mutual fund companies have to make money somehow, right? And we know most of the people Wall Street aren’t exactly poor. The other major form of mutual fund fees is called an expense ratio. Just like the ETF version, this is a percentage of money that is used to run the fund. This includes paying fund managers as well as advertising the fund, and probably a bunch of other small things in there that aren’t really important for you or I to understand. Just like the load, this is a percentage and in our mythical $10,000 investment the 1% or 2% comes out to $100 or $200… but it’s charged every year. It’s really important to keep this fee in check.

Expense ratios can vary widely. In my wife’s Thrift Savings Plan (like a 401k for the military folks) the expense ratio is 0.025% or $2.50 for a $10,000 investment. That’s as good as you can get. On the other of the spectrum, it took me about an hour of searching, but I think the highest expense ratio is the 9.72% one from Giordano Fund. That will cost you nearly a thousand dollars of your 10,000 investment – each year. This is an extreme case that you typically won’t find.

I’ll leave it up to you to do find the mutual funds that fit your goals. To push you in the right direction, I’ll offer you this stock screener from Yahoo.