What Should I Know When Buying Mutual Funds?

starting this time it's California Chad is calling Hi Chad, how are you? How are you doing Dave better than I deserve sir? How I can help? He had a question about a

mutual

fund. I'm just starting to do the investment part and I went. to a broker and I'm finding some good

mutual

funds

with good percentages, like you say, with a front load fee of around 5%, five and three and 3/4 is

what

most of them are, yeah, yeah, Yeah. I was wondering. uh if that's the five,

what

ever you said, 5 and 3/4 percent is

when

you take it you say it's a 12% return, that would mean I'm actually only getting 7%, well, It's not 5 and 3/4 a year, it's 5 and 3/4 the first time you put money in, okay, look, I still don't

know

everything and it was okay, okay, let's talk about it, there are basically three ways to get to This, okay, there is what is called loaded mutual.

funds

that are mutual funds that have a fee and there is no load mutual funds that do not have a fee there are two types of ways to get to loaded funds let's talk about this for a minute we will use it as a teaching opportunity for all of our listeners, okay, okay, and you just tell me this and if you have any questions, you interrupt me while I go, okay, to start with a no-load fund, you don't sell them to a broker, you buy them directly from a company and I'll see their ads in magazines and on websites and things, they're companies like Vanguard and Fidelity, okay, and they're mostly no-load, meaning they don't charge a commission now.

No commission doesn't always mean cheaper for two reasons, one is there are two or three ways they charge fees to mutual funds, all mutual funds have an annual maintenance fee, okay, depending on your balance at the time, Let's say you had $100,000 in there and the maintenance fee was 3/4 percent, that would be $750 they charged you as a fee for maintaining the mutual fund. Well, now a no-load mutual fund has a maintenance fee, so you will still have to pay a fee. There is simply no commission. It doesn't have the 5 and the 3. /4 or the other types of commissions that we'll talk about in a few minutes, so now you have a rate, let's say that uh, let's go back to our example of five and three qus, okay, let's say that you put $100,000 in that fund with that broker and you paid the 5 and 3/4 commission, well that's $5,750, yes, you paid upfront to UPF, then your maintenance fee on that fund, let's say it was a quarter of percentage, only 250 a year, so for 10 years, that would be $2,500 after 10 years, I would have paid maintenance fees 250 per year 10, does that follow?

Yeah, okay and then I would have paid the 5700 on top of that, so we're talking about 7,000. dollars and some change over $10,000 you follow me yeah okay it's been over 10 years since the other one suppose it had an I. I looked at one the other day it wasn't loaded and I didn't buy it because I thought it was a scam, but It had a maintenance fee of over 1% It had a maintenance fee of 1.2% Okay, so 12200 $100 a year, right, yeah, for 10 years on $100,000, that's $122,000. Wow, it's okay, so you paid the commission for the other one, but it was cheaper.

Do you follow me? That's what in my mind I thought, oh if I could avoid the broker I would make a lot more money, but no, but no, if you get one with a high maintenance fee, yeah, so you have to see how they catch you. on the back if they don't get you on the front there are now good no load funds that have reasonable maintenance fees and sometimes I buy a no load fund it's ok I'm not against them just warning you that there is no commission. It doesn't always mean it's cheaper, you have to dig a little deeper to find out, okay, yeah, that's the first thing and the second thing is that with commissions there are basically two ways that people get paid now, one is by doing the five and three quarters. up front, like you're talking about what are stocks, okay and the second way is they're doing what are called C shares and the brokers will manage your entire portfolio for you instead of charging you a commission up front.

I'll do it for 1% a year, which is not a bad deal because you have a broker there to advise you, teach you and help you every year, if you have a good broker involved and you can call him, you

know

. bad news about something and you're worried that the stock market fell 400 points last week in one day and you want to call your broker, you have someone to talk to and in fact, there's research from Chad that shows that if you have a good running back in your corner you tend to win more because you tend not to make such an emotional decision.

Okay, that makes sense. I guess it's worth it, yes, it's worth it to have a coach. There is research that indicates that a lot of that is a matter of In fact, you could do the 1% deal where they only charge you 1% a year and there is no commission, but they charge you a 1% fee to manage everything, but they are there at your entire disposal and you call them if you need them, you know? if you want to put in more money there is no fee except next year you will get a 1% bill on that money you put in on top of everything else you put in but again some people love that and act like it, people who they charge five and three, some of these people have it worse than now in the financial world and they act like the people who charge 5 and 3/4 or scam someone, but let's do the math again because these are the exact same two mutual funds just two different ways to charge a fee 1% to manage it or 5 and 3/4 up front so let's take our 100,000 again 5 and 3/4 is $5,750 okay 1% on 100,000 if not it doesn't grow at all it which would be bad, really bad, but if it doesn't grow at all, 1% is $1,000 a year for 10 years is $110,000, so even if you do 1% with no commission quoting, you'll pay more, okay, so you better do the actions a, yes, as long as you leave it on loan, but if you want to buy and sell the funds inside there and you want to move some things later, you know you're going to pay those stinking 5 and 3/4 every time you do it you move, so the truth is that all three work and I'm fine with doing any of the three as long as you look at them carefully for your situation and decide that I used to be a great defender. only from the front UPF 5 and 3/4 from what we just did, but the 1% is fine and the unloaded is fine, but you are not a saint if you know that some of these guys in the financial world are Pharisees. and they say, oh, I'm a 1% guy, and then these other guys are scamming people with an upfront fee and then people who don't want anyone to be charged a fee or say someone charges a commissioner.

Scamming people just isn't mathematically true, you know, okay, so yeah, I read some of that online, yeah, there's a ton of and I read one in Forbes today, the guy says someone charges a fee, it's a scam artist and it's a used car. sales well that's just not true there are some of them there are some of them that are but if you know I believe in paying a real estate agent a good commission because you usually sell the house faster and for more money , so sometimes a commission is worth it, you just have to get someone who knows what they're doing and you understand what you're getting into, so hey, good question, thanks for joining us and letting me use you to teach.

This is the Dave Ramsey show. Hey guys, thanks for watching, if you enjoyed this video, click the subscribe button to get the latest content and see these other great clips from the show. They can do it. They know that's really the message, whether they have $270,000 in student loans. debt or 27,000 if you have an income of $50,000 or an income of $500,000