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GET MORE MILEAGE OUT OF YOUR INVESTMENTS

- Alan Lavine



Want to boost the return on your mutual fund investments? Here are some simple ways to do it.

  • Avoid funds with large expense ratios. An expense ratio is the percentage of money taken out of your fund's earnings to cover the cost of operating a fund. The average common stock fund has an expense ratio of 1.4 percent. So it can pay to look for funds with expense ratios below that figure. Two fund groups with low expense ratios are the Vanguard Group and the USAA Group. It doesn't seem as though expenses would mean a whole lot, but here's how they can affect your earnings, according to Steve Savage, editor of the No-Load Fund Analyst, Orinda, Cal. Say you have a $100,000 investment growing at 10 percent annually. Without expenses your investment over 15 years would grow to $418,000. With an expense ratio of 1.5 percent, on the other hand, it would grow to just $340,000. In other words, $78,000 would be deducted from your fund for expenses over that 15-year period.

  • Examine how much money your fund has in cash. Funds that keep a lot in cash often underperform in a bull market. Funds that stay fully invested, on the other hand, typically do better when the stock market turns around.

  • Keep tax-efficient funds, or funds that don't do a lot of stock trading, in your taxable accounts. Tax-efficient funds tend to buy and hold stocks for the longer term. Therefore, they do not distribute large capital gains at year-end compared with funds that use rapid-fire trading strategies. Put bonds and growth stock funds in tax-deferred accounts. That way you will defer paying taxes on income and capital gains distributions. If you are in the 27 percent tax bracket, or a higher one, consider owning tax-free municipal bond funds. They are currently yielding around 5 percent tax-free.

  • Avoid funds that keep changing portfolio managers. It can be a sign of trouble. Over the past year, about 70 managers have left 200 funds, according to FundAlarm.com. Also consider that large fund groups often promote their brightest analysts to fund managers. Fidelity Investments has a good reputation for doing this. So, make sure to do some homework.

  • Don't forget to deduct your investment expenses, such as commissions, phone calls and the cost of investment newsletters and financial publications from your income taxes.

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    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).


    To read more columns, please visit the column archive.




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