(MP) If you walk into a store and are told your dollar is only worth 90 cents, you’d quickly take your business elsewhere. That’s what it’s like when you invest in mutual funds if you’re not careful. Many investors fail to read the fine print when investing in funds, which leaves them paying out extra money they would otherwise save. That money goes to the people who sold you the shares and the managers of your funds.
Today I want to tell you how making every penny of your investment dollars can work for you. It isn’t at all difficult if you know where the pitfalls lie when investing your hard earn money.
Where Mutual Funds Pitfalls Lie?
Let’s start with the load – usually around 5%, but as high as 8 1/2%. That’s the commission you paid if you bought shares from a broker or a financial planner who works on commission. Each $1 you invested was immediately reduced by the load – a loss you never make up. Say you invested $20,000 in a mutual fund. Given a 12% return, here’s how much your money would be worth after 20 years if you paid a 5% load, and if you didn’t.
Investing with 100-cent dollars: $193,000.
Investing with 95-cent dollars: $183,350.
Paying that load cost you nearly $10,000! An 8 1/2% load would cost you over $16,000.
What to Do?
An alternative to load funds is no-load funds sold directly by the fund’s management with no middleman involved. Every $1 you invest works toward making you more money with mutual funds. No-load funds advertise heavily in newspapers and magazines and websites. Call their 800 numbers, and they’ll help you pick the right funds. Don’t load funds out – perform no-load funds? Countless research shows that load funds and no-load funds perform equally well.
Be Aware of Funds!
There are other costs, besides loads. Here’s what else to beware of:
Redemption fees: Some funds don’t charge a fee when you buy, but sock it to you with a redemption fee when you sell. Avoid funds that charge this kind of fee.
12b – 1 fee: Some no-load funds charge up to 1% per year to cover the cost of selling you the shares. Invest in funds that don’t charge a 12b-1.
Management fees: Every fund charges one – money deducted from your account every year to cover the costs of running the fund. The rule here is: the lower, the better – 1% a year or lower.