Mutual funds have several ways of charging you for their services many of which you would probably never find out because they are not always apparent.

Entry load:

The first money you will pay is the fee to buy into the fund. It’s called load or entry load. Let’s say the entry load is 5%. So if you invest $10000 you are actually investing $9500 while $500 is being charged as fee. You have got to earn $500 just to get back to square one.

Management fee:

What about the super expert team investing the money for you? The experts need to eat, right! You will never know you are paying this money unless you look at the fine print in a document called prospectus. It can be anything between 0.5 to one percent and is taken out of your earning before you see your results.

Promotion Fee:

In the US known as 12b-1 fee. This is the annual fee the fund charges you for promoting, marketing and distributing its products. In other words the old investors are paying to attract new investors. This fee can be around 0.25 percent.

Other expenses:

I have no clue what the other fee is all about. Perhaps it is for record keeping or the commissions the fund pays. It’s around 0.25 percent

These fees can vary from fund to fund. I have just given you an approximate value of average fees charged by funds. So you end up paying 5% entrance fee and about 1.5% annual fees before you see any returns on your money. But these high priced investment management teams rarely if ever beat the overall market. If you bought stocks of all the companies represented in the index you will probably do better than any professionally managed mutual fund. This is where index funds come in.

Now finally let’s talk about a different kind of mutual fund without the added expenses and commissions discussed above. I am talking about a no load index fund. If the index usually beats the so called smart fund managers (as the historical record shows) it makes sense not to pay the additional costs and to invest your money in an index fund

Conclusion:

You invest in stocks because they pay more than other forms of investment.

You invest in mutual funds because they help you diversify

You invest in index mutual funds because they do just as well as other stock mutual funds and cost less to own.