Two Things to Look Out For When Investing in Mutual Funds

Avoiding these two common investment fund traits can save you thousands of dollars over time: any 12b-1 fees and high turnover rates.

Simply put, 12b-1 fees are fees that mutual funds charge you for marketing their fund.  These fees are in addition to fees charged to you for the administration and management of the fund, and are required to be disclosed by law.

In my mind, 12b-1 fees are extremely shareholder unfriendly and should be avoided at almost all costs.  On a $10,000 investment, a 0.25% fee adds up to $4,195 over 38 years, and a 1.00% fee adds up to $13,951.

Simply put, a fund’s performance over time should speak for itself.

(Sidenote: It’s worth figuring out what peoples’ incentives are and if their objectives are different from yours.  Be extra careful if they aren’t transparent, and a sensible thing to find out is if they put their cents where their mouth is.)

Another thing that you can look for is something called “turnover rate.”  The turnover rate of a fund is the proportion of the portfolio that typically gets traded in a year.

This means that a portfolio with a 100% turnover rate practically changes completely every year.

There are two reasons why this can be bad: 1) it increases the fund’s trading fees, which typically get passed on to the shareholders, and 2) it means you may be paying more taxes at a short-term income tax rate versus a long-term capital gains rate.

Avoiding funds with 12b-1 fees and high turnover rates are two small things you can do to save tens, and potentially hundreds, of thousands of dollars or more over time.

Do any of your investments have high marketing fees and turnover rates?

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