Investorsditched one of the most profitable trades of the year so far, after large tech stalwarts such as Facebook, Google parent Alphabet, Amazon and Apple fell following Goldman Sachs’ declaration that these five companies’ recent outperformance was potentially overheated. The recent downgrade of tech giant, Apple by Mizuho Securities also sustained the tech sell-off.Prime Minister Theresa May’s sudden loss of seats at the Parliament and consequently losing the majority along with the mandate to drive forward a clear Brexit negotiation also fueled volatility.
Amid such uncertainty, the last thing investors will want to do is invest a lot on mutual funds. Thus, investing in funds with the lowest cost seems prudent.
Major Types of Mutual Fund Expenses
While investing in a mutual fund, you generally tend to invest in the following three major types of expenses:
Front-End Sales Charge
This is also referred to as the sales load or the money you pay upfront when you invest in a mutual fund. It is deducted from the investment amount and, as a result, lowers the size of the investment. This is generally paid to the investment broker or advisor as sales commission. For instance, if the investor puts in $10,000 in a fund and pays a front end load of 5.75% or $5.75, the remaining $9,425 is used to acquire the shares of the mutual fund at the current price.
Back-End Sales Charge
This is a fee that investors pay while selling or redeeming shares of a mutual fund. It is also known as a contingent deferred sales charge. This can be a flat fee or steady decrease over time to attract investors to hold on to their investments.
A mutual fund tends to have the same operating expenses as any other business in the form of management fees, salaries and administrative expenses. Thus, an expense ratio is the fund’s annual operating expenses. For example, if the expense ratio is 1%, then for every $1,000 you have invested, you pay $10 a year.
How Expenses Might Hurt You?
You will be surprised at how much expenses and fees can really cost. For example, you have $10,000 to invest. Historically, the S&P 500’s average return is 9.5% per year, which means $10,000 compounded at this rate for the next 30 years will fetch you $152,200.
Suppose you invest in a fund that also generates 9.5% on an average per year. But, to invest in such a fund, you have to pay a 3% front-end sales charge and also an expense ratio of 1% on a continuous basis. Then, after 30 years, you will receive $109,200. In other words, such charges reduced your investment gains by $43,000.
5 Mutual Funds with the Lowest Expenses to Buy Now
We have, thus, chosen five mutual funds having no-load and low expense ratios. Such low-cost funds also flaunt a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 3-year and 5-year annualized returns and have minimum initial investments within $5000.
The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
DFA U.S. Large Cap Value II Portfolio (DFCVX – Free Report) seeks long-term capital appreciation. The fund pursues its objective by investing substantially all of its assets in its corresponding master fund, the U.S. Large Cap Value Series of the DFA Investment Trust Company, which has the same investment objective and policies as the U.S. Portfolio. The fund’s 3-year and 5-year annualized returns are 8.3% and 17.4%, respectively. Its annual expense ratio of 0.15% is less than the category average of 1.06%. DFCVX has a Zacks Mutual Fund Rank #1.
Strategic Advisers Core (FCSAX – Free Report) allocates assets among affiliated equity funds and non-affiliated equity funds that participate in Fidelity’s FundsNetwork, and non-affiliated ETFs and sub-advisers. The fund’s 3-year and 5-year annualized returns are 9.3% and 15.1%, respectively. Its annual expense ratio of 0.18% is less than the category average of 0.99%. FCSAX has a Zacks Mutual Fund Rank #1.
MFS Growth Allocation R4 (MAGJX – Free Report) is designed to provide diversification among different asset classes by investing in other mutual funds advised by the adviser, referred to as underlying funds. The fund seeks a high level of total return consistent with a greater-than-moderate level of risk relative to the other MFS Asset Allocation Funds. The fund’s 3-year and 5-year annualized returns are 5.9% and 10.7%, respectively. Its annual expense ratio of 0.1% is less than the category average of 0.81%. MAGJX has a Zacks Mutual Fund Rank #2.
Vanguard Balanced Index Investor (VBINX – Free Report) seeks to track the performance of a benchmark index that measures the investment return of the overall U.S. stock market. The fund employs an indexing investment approach designed to track the performance of two benchmark indices. The fund’s 3-year and 5-year annualized returns are 6.9% and 10%, respectively. Its annual expense ratio of 0.19% is less than the category average of 0.85%. VBINX has a Zacks Mutual Fund Rank #2.
New Covenant Balanced Growth (NCBGX – Free Report) invests primarily in shares of the New Covenant Growth Fund and the New Covenant Income Fund, with a majority of its assets generally invested in shares of the growth fund. It seeks to produce capital appreciation with less risk than would be present in a portfolio of only common stocks. The fund’s 3-year and 5-year annualized returns are 5.3% and 8.4%, respectively. Its annual expense ratio of 0.14% is less than the category average of 0.85%. NCBGX has a Zacks Mutual Fund Rank #2.
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