Be wary of rising mutual-fund fees


November 25, 2008|By EILEEN AMBROSE

Brace yourself: Your mutual fund fees will likely rise next year.

Management fees are often tied to the amount of assets in a fund. The more money in the fund, the lower the fees. But with the plunge in stock prices and investors pulling cash out of funds, assets have been falling.

It's easy these days to forget about fees when your fund might have lost 40 percent or more in the past year. But fees matter over the long run, and you can end up with a lot less money even if you're paying what seems to be only slightly more for a fund.

Funds often have "break points," where management fees are lowered once assets climb to certain levels.

For instance, a fund might lower its management fee from 0.6 percent to 0.5 percent once its assets reach $1 billion, and then lower it again to 0.3 percent once assets top $10 billion, says Russel Kinnel, director of mutual fund research at Morningstar Inc.

"Now, they're triggering a lot of break points in the opposite direction," Kinnel says.

On top of that, other expenses that are also part of a fund's annual expense ratio - such as services provided to the fund by third parties - might go up slightly, Kinnel says.

Fund experts say it's too early to tell how high fees might go.

Jeff Tjornehoj, a senior research analyst at mutual-fund tracker Lipper Inc., estimates the typical stock fund might see its total expenses rise by as much as 0.10 percent.

Morningstar's Kinnel says international funds are likely to see the biggest fee increase. International stocks have seen steeper declines than their U.S. counterparts this year, he says.

"The dollar has been so strong, so on top of the market losses, you have currency losses," he adds.

In 2006 and 2007, international funds had seen some of the biggest drops in fees as investors plowed money into the high-performing funds, Kinnel says.

Tjornehoj says investors tend to care more about fees when gains are modest and they want to grab every bit of return they can. But in extreme times, when the market is sharply up or down - like now - investors care more about overall performance, not fees, he says.

"They do matter at all times," Tjornehoj says. "Over time, [fees] will figure into your total return. Simply picking an expensive fund, just because someone suggested it, is just not good enough."

Funds with low fees also tend to have some of the best managers, Kinnel adds. "Not because they want to work for less," he says. "The good funds tend to attract a lot of money and have lower costs."

If you purchased a fund with exceptionally low fees, it likely will remain lower than its peers if fees go up industrywide, Kinnel says.

And if you are shopping for a mutual fund, look for the fund with the lowest fees among its peers, Kinnel advises. Then, when you compare it to its peers, he says, ask yourself: Is there a good reason to choose one of the more expensive funds?

If there isn't, stick with the cheap fund.

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