Mutual funds is one of the most popular investment vehicles for retail investors. There are thousands of mutual funds and one of the best ways to select the bust fund is to take a closer look at the mutual fund expenses. One of the determining factors an investor can use when selecting their mutual fund is the expense ratio. This ratio is computed by dividing the fund's total annual operating expenses by the value of all securities held by the fund. There are five main components of mutual fund expenses: (1) management fees, (2) legal fees, (3) administrative costs, and (4) marketing fees.
Management Fees Management fees are the monies paid to the fund managers responsible for handling investment decisions of the mutual fund. For the majority of the time the fee is paid regardless of whether the fund makes money or not. Management fees typically range from 0.5% to 1% of the fund's assets per year.
Legal Fees and Administrative Costs Legal fees are related to all of the costs associated with creating legal documentation, court cases and retainers. Regardless of how much information you provide or documentation a client will sign wavering you from any responsibility, there is always someone that will come after you with a suit. Administrative Costs Like all businesses, mutual funds need a back office to process paperwork, account management, etc. With the advent of computers and technology, many mutual funds outsource their back office tasks to companies that specialize on these activities. This allows the mutual funds to lower operating expenses and focus more on their trading. Marketing Fees Mutual funds are allowed to market their companies and services via televisions, print, and radio. Some firms pass these costs on to their clients which is known as the 12b-1 fee.
Summary In summary expenses are a part of doing business with mutual funds. You the investor will have to determine relative to the amount of expected return, what you are willing to pay on an annual basis. Another thing to note is that the expenses will vary depending on the structure of the mutual fund. Currently the expense ratios for stocks are 1.5% per year, just under 1% for bond funds, and .6% for money market funds.

By: Alton Hill

Internet and electronic trading have revolutionized the way a common man investor can invest in the markets. We use the term markets very loosely and need to understand specifically the options we have. Each of these markets needs specific skills and knowledge. All are not the same. Each investor need to identify his /her goals , skill set, level of interest and then choose an appropriate investment route.

Stocks are probably the largest in all financial investment mediums. There are several stock exchanges where one could buy stocks through a variety of on line and offline stock brokers. There are also direct purchase options for shares. This involves buying shares directly from companies by avoiding charges etc through share transfer agents such as "Computershare". Bonds are debt instruments where an investor buys a part of the debt through a Bond. This gives a fixed rate of return for each period, quarter, half year or annual. You could again buy a bond through an on line or off line broker. Purchase of shares and bonds requires one to develop certain skills in understanding markets, terminology, identifying safe investment opportunities and so on.

Mutual funds are a method for the investors to participate in stocks and bonds. Mutual funds collect small amounts from investors pool it into a large fund and actively manage their funds. The returns after deducting expenses and taxes are reinvested or paid out as dividends. Investors spend less effort as the mutual fund money managers manage the investments for them. There is a lower risk due to diversity of stocks and bonds held by a balanced fund. Mutual funds are actively managed and hence have a higher expense quotient. The friction caused by purchases, sales and brokerage also adds to expenses.An index fund is passive, just tracks a market and has less expenses.

Derivatives are a more recent phenomenon. It is named as a derivative as it is derived from underlying assets. It is very speculative and has potential for huge gains or huge losses. Common examples are forward contracts, options swaps etc. This needs a very high level of sophisticated skills and understanding.

Participation in any investment needs skills and knowledge. Most of it is gained while actually investing. There are a number of free resources for one to learn. Paper trades- where one trades on paper and not with real money are a way of getting knowledge without burning a hole through your pocket.

Article Source by: Easwar_Koovappadi