This is certainly not news that the average investor likes to hear, but several major mutual fund families are beginning to raise fees and expenses in some of their mutual fund names. Notably, Vanguard announced that its US Value Fund will now charge 0.46% versus its previous level of 0.37%. Vanguard has always been the leader in keeping mutual fund fees as low as possible, and though this level is still very reasonable it points out the fact that rising fees and expenses are a major concern right now.

What’s causing the need for mutual fund families to raise mutual fund fees during this economic recession? Quite frankly as mutual funds have more and more money taken out of them by investors during the current economic recession and market volatility the mutual funds have their margins squeezed. The mutual funds are forced to do something to cut their costs and increase their revenues, which usually means either quite a few jobs will be lost or the expense ratios at their funds will go up. In some cases there may be jobs lost as well as ratios rising. Two years ago the fund was probably managing enough money that they could efficiently produce a nice profit, but now they have far less money to handle and things are much tougher.

The fact that mutual fund expenses are likely to go up in the coming months is a bitter pill to swallow for investors who have seen their mutual funds lose a significant amount of their value in the last year or two. In the end it simply is a business decision that some mutual fund families will have to make, because they are trying to run a profitable business. As an investor finding mutual funds with solid low cost ratios will be more important than ever in the coming months.

Have you ever tried to get into high profile mutual fund and found out that the fund is closed for new investors? All such funds are opening up again for new investors because of huge cash outflow from those funds. Oakmark Equity & Income, Sequoia like funds opened the door for new investors to get more money in. If you had eyes on some of these exclusive funds, check out whether those funds accept new investors now. The odds are in your favor!

Source: Wall Street Journal

As an investor in mutual funds you should certainly be considering how much you are paying in expenses. If you have read this blog before you know that no one should be paying for any loaded funds, so we’ll assume you have a no-load mutual fund. The question then becomes, what is a reasonable expense ratio for mutual funds?

There is no single correct answer for a reasonable expense ratio for mutual funds, since funds in different parts of the market tend to have different expense ratios. The best way to gauge how expensive a mutual fund is can often be to compare it to its peers.

The good news is that over the past few years the average mutual fund expense ratio has actually dropped quite a bit. Last year the average expense ratio was just 1.19% as compared to 1.40% in 2003. The bad news is that many mutual funds are now speaking of the need to raise their expense ratios again.

There are a couple reasons for the drop in mutual fund fees in the last few years. The first one is that the overall stock market has suffered a great amount, which generally leads to lower fund expenses. The second is the increase in the amount of index funds, which are far cheaper than other funds that are actively managed.

I suggest investors use Morningstar to look at a particular mutual fund and compare it to all of its peers. There simply is no reason for any one fund to have expense ratios far higher than a similar fund. You do need to understand that funds such as international funds, emerging market funds, and small cap funds tend to have higher expense ratios. The lower expense ratios are typically found in index funds, large cap value funds, and passively managed funds.

Comparing mutual fund expenses is a great idea, just make sure you are comparing apples to apples and not apples to oranges!

Investing in mutual funds is a very popular thing to do for many investors. Mutual funds make a lot of sense for a large section of the population since they allow you to quickly pool your money with other people’s money and receive professional management and great diversification of your investments. Before you invest in a mutual fund, you should always do your own research as to which fund is worthy of your investment. I have compiled a list of five sites that are great to use for mutual fund research purposes.

Top Five Mutual Fund Research Sites On the Net

1. Morningstar.com – For quite some time now Morningstar has been considered the gold standard in mutual fund research, and for good reason. Morningstar has dozens of analysts in all of the mutual fund fields that are specifically trained to follow every move that the mutual fund managers make and take note of every correct and incorrect step they take. Compare mutual funds in the click of a mouse at this site with no problems. Morningstar mutual fund ratings are also available for free to the public. The broadest offering of mutual fund research is here.
2. Yahoo Finance – The Finance site at Yahoo has always been one of their stalwarts and the mutual fund page is definitely very useful. The mutual fund screener is dynamic, and completely free to use. Yahoo also has an easy way to track the top 10 holdings of each mutual fund in daily trading.
3. WSJ.com – Wall Street Journal Online is often overlooked for mutual fund research, but I find the site to be very useful. The site is great at ranking which funds perform well vs. their peers over the short and long run, and the mutual fund charts here are above average.
4. Kiplinger.com – Kiplinger Magazine is much more focused toward investments such as mutual funds versus individual stocks, and the website also has some great information. Kiplinger has a list of its favorite mutual funds, which it calls the Kiplinger 25, which have outperformed the market nicely in the long run.
5. Fool.com – Motley Fool is a good website to use to understand the basics of mutual funds as well as the catches of some mutual funds. The Fool does a great job of showing investors what to avoid when looking for great mutual funds.

If you are like most mutual fund investors you are looking for some of the top mutual funds available to you that you can count on to outperform the overall market. As an investor in a mutual fund you must realize that no mutual fund manager can always make the right stock picks and no mutual fund will be immune from economic downturns such as the one we have right now.

The true key to finding the best mutual fund is to look for consistent out performance by the mutual fund. What does this mean? It means that this mutual fund needs to perform better than the average mutual fund in its peer group quite consistently. If you are looking at a large cap growth mutual fund then you should compare this fund against others that invest in similar companies. Make sure you are comparing apples to apples and not apples to oranges.

The best mutual fund managers will clearly state their investment theories in annual reports, and you would be wise to look closely through these reports. Understand what this mutual fund manager is thinking about the market and see if you agree with his method of picking stocks that should do well in the future. Another often overlooked point that is very important is the length of time this manager has spent with this particular mutual fund. It is a huge plus if the mutual fund manager outperforms over a long period of time at the same fund, but it is a red flag if the mutual fund has done very well, but continues to switch managers in recent months or years. Manager tenure should be one of the main things you look for in a top mutual fund.

The best of the mutual funds will also have the things that we should be able to count on, but aren’t always able to. These things include; great customer service, no-loads, and low management fees. There are tons of mutual funds out there, as an investor you can afford to be picky!

A mutual fund is a great tool to use to invest in the stock market without having to actively manage their own money. The instant diversification of a mutual fund is a terrific advantage for those who are just starting out investing their own money. These things being said, you need to be picky about what type of mutual fund you get into. Mutual funds come in all different sizes and shapes, so there is bound to be one that fits your needs, but it is up to you to make sure the fund is in line with your financial goals and expectations.

For example, if you are about to retire and want to be in a mutual fund it would be wise to go into a mutual fund that contains a fairly large percentage of bonds or money market assets that are very liquid. Someone in this age bracket simply shouldn’t take the risks that investing in stocks bring with them, and the last year should be a perfect example of what kind of risks there are. On the other hand, someone who is very young and is simply looking for long term out performance from their mutual fund can be much more aggressive in their choices of mutual funds. This age bracket would likely want to include some aggressive growth and some foreign stock funds in their portfolio. Over the long run, despite the lumps they should expect to finish ahead of where they would have in a simple treasury bond or certificate of deposit.

Don’t get stuck in the wrong kind of mutual fund. Weigh your options and consider your financial needs and goals thoroughly. Think about it this way, when you put your hard earned money to work in a mutual fund you are entrusting a money manager with your future so it certainly isn’t something you should take lightly!

In the past there may have been a time where mutual fund companies could keep a load on their fund because its performance was just so stellar that it warranted an investor buying in even with the huge fees, but that day has come and gone. There is a plethora of great no load mutual funds available to investors, and there is really no good reason whatsoever to get into a fund that has a load.

What is a loaded mutual fund? A loaded mutual fund is a fund that charges a sales commission for buying shares in the fund. These charges can be front-end loaded, meaning they are taken out when you first invest in the fund, or they can be back-end loaded, taken out when you pull out the money. These fees can be very steep, as much as 6 or 7% in some cases. Let’s say you just invested your hard earned $25,000 into a loaded mutual fund with a front-end load of 6%. Do you realize that your investment will automatically be worth only $23,500 because of this front-end load? In reality back-end loaded fees are even worse since, the hope is at least, that your portfolio is worth more at that time.

If you work with a financial planner to help you in allocating your assets, I strongly suggest you make it a point to let them know that you only want funds without a load. The reason I make this point is most financial planners get a nice kickback from selling the loaded funds, so while it won’t help you, it does help them to push a loaded fund.

The differences between no load funds and loaded funds are simple, but they can eat a hole in your pocket very quickly. Just say no to loaded funds and make your investment go that much farther for you.

Many individuals have the wrong idea about saving and investing their money. There is large group of people out there who believe that in order to make a viable investment they must have a large amount of money. In recent years this has become even more untrue with many new products that help serve those who have saved up small amounts of money to invest.

If you want to invest in the stock market with small amounts of money DRIPS and Direct Purchase Plans are perfect for you. These are both great because they have no minimum investment amount and no minimum monthly or annual contribution. This is a great way to invest directly into a certain stock and only buy portions of a share. DRIPS and Direct Purchase Plans are perfect for those who are patient and are investing with small amounts of money.

Want to invest in a mutual fund, but you’re afraid you won’t have enough? There is good news for you here as well. More and more mutual funds are moving to make themselves available to even those on a shoestring budget. There are quite a few mutual funds with a minimum of $500 or lower now. In fact, there are several funds with a minimum of just $250, or even $100 to open an account. Typically, index mutual funds have lower minimum requirements.

If you are looking for a guaranteed return, many banks are offering low minimum certificates of deposit and money market savings accounts. While you may not earn quite as high of yield as those who have a huge bundle of money, it still sure beats the heck out of just having the money sitting in a piggy bank making you absolutely nothing.

The fact is, every little bit of money you save can and should be invested. The days of only the rich being able to invest are long gone.

Most of the mutual funds go long (buy and hold) on the stocks. Some of them short the stocks. Few mutual funds practice long-short strategy meaning that they go long some stocks in their portfolio and short the rest of the stocks.

Traditionally, mutual funds used to buy or short the stocks. They don’t normally play with options. Derivatives like options are the favorite of hedge funds. Mutual funds tend to stay away from the derivatives to reduce the volatility. However, in the recent years some mutual funds were started to adapt the “buy-write” strategy which essentially is writing covered calls on the stocks owned.

What is covered call? If you own a stock, you can write a call option on that stock. You already own the stock, so it is “covered call”. If you write a call option on a stock without owning the stock, it’s called “uncovered call” or “naked call”. Ok, don’t ask me why it’s called naked!. May be because some people lost their cloths by writing uncovered calls.  Covered calls are conservative play. Uncovered calls are dangerous, there is literally no limit for the loss if uncovered call option position goes against you.

When you write a call option on a stock, you promise the buyer to deliver the stock at a certain price on or before a specified date. You get the call option premium from the option’s buyer to reward you for your commitment. The buyer wants to buy your call option, because he/she thinks that stock will go up soon. If the stock goes up after you write the covered call you will lose all the upside potential of the stock. If the stock goes down, the buyer of the call option lose the money.

In difficult times like the one we currently face, writing covered calls on the stocks you already own would be a prudent thing to do. Covered calls are also known as “buy-write”. Some mutual funds offer funds that use covered call strategy to reduce the volatility of the portfolio. Risk managed equity option income fund (EROAX) from Eaton Vance is one of them. This fund seems to weather the storm of the recent weeks compared to S&P 500. See the chart below for the comparison.

Disclosure: I do not own the mutual funds mentioned in this post.

If you like this post, check out the part-2 of this post.