Fees and Expenses

• Mutual funds as professionally managed investment vehicles charge fees and expenses. While fees paid as sales charges directly reduce the amount of capital investors put into a fund, expenses paid to fund management annually as a percentage of a fund's assets lower net investment returns for fund investors. Even small differences in fees and expenses among mutual funds could have a large compounding effect on investment returns over long periods of investment time. Higher fees and expenses may be justified for actively managed mutual funds, especially for funds that are more specialized, offering additional services and requiring more investment research.
  
  

Fund Returns

• Fund returns are a primary criterion for buying mutual funds. But funds with the same returns may or may not retain the same level of performance over time, which should be more of a concern to investors. Smaller funds may achieve better performances than larger funds sometimes because they invest in fewer number of stocks, and when successful, those stocks' performances can have a bigger impact on fund returns. However, such welcoming returns may not be sustainable when the performances of the limited number of stocks all fall. On the other hand, larger funds are more diversified, and can have steadier returns. Funds with longer history are also more likely to maintain their stated returns than newly formed funds, since returns averaged out over long period of time can be more reliable.
  
  

Fund Risks

• Fund risks are another important factor to consider when buying mutual funds. Some funds strive to achieve higher returns by taking on higher risks. Others put the safety of fund investments first, and settle on less returns. When making buying decisions, investors have to balance between returns and risks based on their own levels of risk tolerance. Fund risks are also reflected in the volatility of fund returns. Some funds can have great performances in some years and poor performances in other years, as opposed to having a more smooth performance over time. Investors with different investment-time frames may choose to buy funds of different volatility. For example, investors who can afford to have their investment money tied up may benefit more from volatile funds, as they could ride out the volatility over time if they have to.
  
  

Portfolio Turnovers

• Actively managed mutual funds tend to buy and sell at higher frequency rates, because they constantly try to pick and choose securities that they think can generate the best returns. But such portfolio turnovers may also generate higher trading costs and capital gains. Capital gains, when distributed, cause investors to owe taxes. By law, mutual funds must distribute realized capital gains periodically. If an investor buys a fund after a capital gain has been realized but before it is distributed, the investor would later receive the capital-gain distribution essentially as a portion of his own investment principal, and pay unfair taxes on it. Therefore, always check a fund's distribution time, and buy after distributions.