The cheapest mutual funds
People - Investing
Sunday, 25 May 2008 16:46

The return on your investments depends on the costs that go with your investments. Especially in the long run costs really do make the difference. When investing in mutual funds it is important to select the funds with the lowest costs. In particular funds that invest in a broad index charge lower costs to their investors.

There are three types of costs: indirect costs related to the trading of the fund, the direct yearly charges of the mutual fund and your own costs for trading the fund.

The first kind of costs is difficult to estimate, even for the manager of the fund. They consist not only of direct trading costs but also of the difference between the bid and ask price with each trade. As a general rule the trading costs percentage is roughly equal to 0.008 times the turn-over percentage of the fund. So if a fund trades 50% of its assets per year then the trading costs are roughly 0.4% of its total asset value.

Investment funds usually publish the second type of costs as the total expense ratio. So if a fund has a turn-over ratio of 50% and the expense ratio is 0.5% then the yearly cost connected with your investment are 0.9% plus your own trading costs. When you buy an ETF (Exchange traded fund) take care that the spread on your trade is not ridiculously high. Especially big funds often have favourable spreads.