What do all these terms mean?

[Guest Hawaiian_Kalohi]

:confused:

Hello~

I'm new to researching Roths and I'm trying to find a fund to invest in but I don't understand how to compare one fund to another.

What is a sales charge and what is a good % rate?

What is a transaction fee and what is a good % rate?

What is breakpoint pricing?

What is a management fee and what is a good % rate?

What is an expense ratio & what is a good %

How do you compare returns? For instance I found one fund that had an 1 year return of 55.55% and another with a 1 year return of .34.

Aloha and Mahalo (Thank You)

[John G]

Mutual Fund Terms:

Sales charge: these can be front end, back end, declining with longer holds, etc. Way back when Neandrathals were roaming the planet, mutual funds charged about 7% up front to participate. The trend has been away from these commissions, in fact a whole new breed of mutual funds called NO LOADS have emerged. No loads do not charge any fixed commission up front or on the back end. From my perspective a good rate is zero.

Transaction fees: probably refers to the sales charge, see above. I do not know of any mutual funds that charge a fee on each transaction. Avoid any fund that charges you for a transaction.

Breakpoint pricing: no clue, this maybe part of some gimick sales pitch.... provide fund name and context and I will try and respond

Mgmt fees / expense ratios: all funds, including NO LOADS, have operating costs that need to be recovered. Just look for the annual expense percent which must be reported. Index funds with little analyst support (like a Vanguard 500) can get their annual fees below 0.3% while international growth funds could have fees in the 1.8% range (all those junkets to Thailand and New Zealand to look at companies). Lower annual expense rates are better, which is why the index funds often score well. Analyst guided stock funds range from .4 to 1.5%. Above that range becomes more questionable... and often you can find a similiar fund with a lower rate.

Annual IRA fees: some custodians charge an annual fee for each IRA, supposedly to pay for extra IRS reporting requirements. Etrade and many of the new online brokerages do not. Annual fees can range from absurd $100/yr to zero. Some firms like Schwab waive the fee if your IRA or total assets are above 5k or 10k. Some custodians will waive the fee if you just ask. Use your judgement and compare service, convenience and fees. I prefer zero annual fees.

Performance / annual returns: First, understand that previous track record is no guarentee of future performance. Trends change such as the wide spread decline of tech and growth stocks compared to value over the past two years. Another possibility is that the fund manager/analyst might leave. Short term returns like 1 year are USELESS, they draw your attention to the recent radical performance of say energy exploration firms (this year) or internet commerce (last year) or plastics (in the 60s). If you chase last years top sector, you will get burned. It is very common for last years "winners" to be next years big "losers". A more useful indicator of a successful fund is the 10 or 20 year return. High returns would indicate a high percent of equities (stocks) and most likely growth stocks. Annual returns in the 10 to 14% range are respectable over the long haul and will build a substantial nest egg.

Since there are more than 8,000 mutual funds, you can easily get lost and distracted. Try the March issue of Consumer Reports for a thoughtful list of about 100 no load mutual funds that seem to consistently get good results. Initially, you need one good broad based mutual fund. After your assets grow, you may want to pick up a different fund or two but there is no reason to own dozens of mutual funds.

[Guest irr7342]

a breakpoint is a reduced sales charge for depositing a larger sum of money. For example, if you deposit less than $25k you may pay a 4% sales charge (or load). More than $25k and it's 3%, more than $50 and it's 2%. These are hypothetical #'s. This is a legitimate financial term. No gimmick. Registered Investment Advisors are required by law to disclose breakpoint info where appropriate.

[John G]

IRR, thanks for the input.... I know breakpoint in other applications but not mutual funds. Sorry about the gimick remark.

Ah, the power of NO LOADs, you just don't get those technicalities or "critical dates". Since in a Roth or IRA you don't need to worry about capital gains and dividend distributions either.... why not go all the way and banish the sales commission by going no load?

Yes, some people need help selecting investments and the advisor should not work for free. But I think the majority of Americans can read a couple of articles on diversification of investments and choose a couple of mutual funds without all the extra help. And, if they need help they have Money, Kiplinger, Worth and even Consumer Reports. Then there is Uncle Ruckeyser's newsletter and Morningstar evaluations. There is actually too much info.

Having sold three different houses on my own, perhaps a bias toward self help is showing! But I have a hard time giving away 7% up front to someone who probably has not read the prospectus either.

As of former consultant, I know the game of asserting hidden wisdom. But mutual funds are pretty transparent. The average college educated American can learn and act. Too many advisors steer consumers to products that offer them a commission and not many are truely up front about that.

[Guest Hawaiian_Kalohi]

Thank you!!

This gives me something to work with and your responses were in plain english!

I do agree with your second post as there is too much information out there and it is becoming overload for the "typical" person and I plan on meeting with an adviser to see what they can help me with. After that I'll see what I can do on my own, but frustration is setting in pretty strong.

I'll let you know if I have more questions, again, thanks for the help!!