Mutual Funds Require Some Study

Radio Transcript, 2 minutes 30 seconds, for use during week of Nov. 26.

Description: Penny, Susan and Ira talk about factors to consider when researching mutual funds.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection Trust, providing investor education on the web at: investorprotection.org.

Susan: Penny, we’ve talked about the advantages of mutual funds for investors.  What should I consider when looking at mutual funds?

Penny: Remember, with mutual funds you’re paying for the expertise of the people who manage the funds.  So, you can expect to pay a management fee but that fee will vary from fund to fund.

Ira: Can there be other fees?

Penny: Some funds charge a fee or “load” of 3 to 6 percent when you buy shares.  But there are many “no-load” mutual funds that don’t charge this fee. Other funds don’t charge when you initially invest, but do charge a redemption fee or back-end load if  you sell your shares within a certain number of years.  Funds may also charge what is termed a 12b-1 fee, which is an annual fee covering the marketing costs of the mutual fund company.

Susan: It looks like the different fees could really affect my returns.  How can I find the right mutual fund for me?

Penny: You need to consider the expense ratio of the mutual fund.  That is, the percentage of the fund’s net assets that go to annual operating expenses.  To do this, you can use a mutual fund calculator.  The Securities and Exchange Commission provides one.  Go to www.sec.gov and click on ‘Investor Information.’

Ira: So if two funds have similar performance I should select the one with the lowest expense ratio?

Penny: That’s right!

Susan: Are there tax concerns with mutual funds?

Penny: Good question, Susan.  Unless the mutual fund is part of a tax-deferred account, the distributions--capital gains, dividends or interest--must be reported by the investor as income.  In addition to tax on income made by the mutual fund while you own it, when you sell shares, you may have a capital gain or loss.

Ira: Thank you, Penny.  You’ve given us lots to consider.

Penny: You’re welcome.  And remember for more information, visit ISU Extension at extension.iastate.edu and look for ‘Invest Wisely.’