A mutual fund usually has an expense ratio, that is, a percentage of its assets that it collects for administrative fees and “expertise.” The actively managed funds generally have higher fees because you’re paying the manager to be good at his job. Passively managed funds generally have lower fees because you’re basically paying for the administrative fees. Just as you should know how much that sweater or that cup of coffee costs, you should know how much you’re paying your brokerage for your funds because it adds up in the long run. Forbes’ eighth tip in their ten rules series is that you should keep an eye on the fund fees.
When you review the fees, it will be broken up into administrative and management fees. Forbes recommends not getting a fund with a management fee greater than 1%. Here is where the ten rules start to confuse me… if Forbes recommends that you should not try to beat the market and that you should avoid high fees, why don’t they just come out and say that you should invest in index funds? Those funds match the market perfectly and they usually have incredibly low fees.