||Ask Dr. Don
Investing in Treasury securities
U. S. Treasuries. I don't know anything about
them. Where can I get information?
The Bureau of Public Debt has a primer
on Treasury securities on its Web site. You'll learn all about
what is considered to be the safest investment on the planet. You
can also learn about investing
in U.S. Savings Bonds.
Mutual fund returns
How do I find out how actively managed my mutual funds are since
I understand that the cost of managing and buying/selling my share
in any mutual fund will lower the "real" return on my
You've brought up some important points about investing in mutual
funds, but you've mixed them all together. Here's how I would have
you look at these concerns.
All mutual funds have annual expenses. These expenses
are typically a combination of management and marketing fees. The
fund manager is paid a percentage for managing the fund's investments
and even a no-load mutual fund can charge annual fees for marketing
the fund. The marketing fees are called 12b-1 fees and are separate
from any sales loads (commissions) charged by a mutual fund. (No-load
funds are called that because they don't charge a sales load.) Small
funds and specialty funds typically have higher annual expense ratios
than large funds, index funds, or funds investing in large capitalization
A fund manager is being paid to make trading decisions
on the investments in the fund. Even an index fund will have turnover
as changes to the index necessitate changes in the mutual fund,
but high turnover can be bad on two fronts. A mutual fund is required
to pass through the gains (losses) and income that the fund realizes
in a year. Since capital gains (losses) aren't realized until a
stock is sold, a fund with high turnover is more likely to generate
a tax liability in the current year than a fund with low turnover.
So tax efficiency is one consideration when looking at a mutual
fund's turnover ratio. A second concern is that a fund with high
turnover isn't taking a long enough view when making investments.
The commissions paid by the mutual fund when trading stocks in the
fund aren't something that you need to be concerned about.
To show how these factors can differ between mutual
funds, I've chosen two mutual funds and compared them on the basis
of annual expense ratio, tax efficiency, turnover, and sales loads.
While the comparison wasn't random, there's no implied recommendation
of one fund vs. another in the comparison.
According to Morningstar, the Vanguard Index 500 fund
(VFINX) has an annual expense ratio of 0.18 percent, a tax efficiency
ratio of 90.99 percent, turnover of 9 percent, and is a no-load
mutual fund. In contrast, AXP Blue Chip Advantage A (IBLUX) has
an annual expense ratio of 0.83 percent, a tax efficiency ratio
of 43.40 percent, a turnover ratio of 81 percent, and clients pay
a front-end sales load of 5.75 percent.
To be fair, the Vanguard Index 500 is both an index
fund and one of the world's largest mutual funds. It will have a
low turnover because it is an index fund. Sales loads are a common
method of compensating financial advisers for their services, and
investors that depend on a financial adviser when making investment
decisions should be aware that they are paying for that service
through a sales load.
There are dozens of sites that you can use to review
mutual funds. Morningstar.com
TheStreet.com are the two sites
that I use to review mutual funds before going on to read a fund's
If I'm looking for a foreign stock fund, a sector
fund, a small-cap or mid-cap fund, I realize that the annual expense
ratios are going to be higher than for an index fund or large cap
fund. On the other hand, if I'm having trouble deciding between
two funds, I'll always choose the one with the lower expense ratios.
A mutual fund's tax efficiency is much more important in taxable
accounts than it is in tax-advantaged or tax-deferred retirement
accounts such as Roth IRAs, traditional IRAs and 401(k)s.
Be aware of the commissions and expenses that
you pay to invest in mutual funds, but don't let them be your only
concern when investing. What the fund invests in, its stated objectives
and how the investment relates to your other investments is important,
-- Posted: July 6, 2001