Investment Advice: Beware of Mutual Fund Fees

Based on that prospectus net expense ratio, some funds may see their expense ratios this year rise by .20 percentage points or more. According to Kinnel's research for Morningstar, funds in this category include American Century Small Cap Value, Artisan Small Cap and Greenspring.

Given that many mutual fund investors have experienced losses in excess of 30 percent, a .20-percent expense ratio increase seems hardly worth mentioning.

But keep two things in mind. First, expenses compound over time.

Imagine today you invest $100,000 each in two mutual funds. They are identical in all ways except for one -- the fees they charge. One charges a .50 percent expense ratio; the other 1.5 percent.

Then suppose over the next 25 years they both post the same pre-expense return of 7.5 percent per year. That means an after-expense return of 7 percent for the cheaper fund and 6 percent for the more expensive one.

What does that 1 percentage point difference amount to for you, the investor, over 25 years? It's nearly $114,000.

A second thing to keep in mind about fund expense ratios is that there is a connection between expenses and performance. The lower the cost for a fund, the more likely it is to be a top performer.

"Many studies have indicated expenses are the best predictor of future performance," Kinnel said. He recommends looking for funds that rank in the bottom 20 percent for expenses in a given fund category.

Follow that process, and your chances of selecting a top performer increase dramatically.

That's something to keep that in mind as you try to rebuild your portfolio for the years ahead.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at

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