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.

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!