Best No Load Mutual Funds
By Sam Subramanian, Thu Dec 8th

When searching for the best no load mutual funds, some mutualfund investors often tend to focus exclusively on mutual fundfees and expense ratios. Is this always a smart way to selectmutual funds?

Metrics such as price/earnings ratio and dividend yield on theS&P 500 index, a commonly used proxy for the U.S. stock market,are hardly at bargain levels. This has lead several marketpundits to predict single digit annual returns for domesticmutual funds over the next decade.

While pursuing the search for the best mutual fund, some mutualfund investors tend to focus exclusively on fees and expenseratios. The rationale is that by choosing with lowfees, investors will have more of their capital invested. Also,no load with low expense ratios will pass on moreof the returns they earn to their shareholders.

Is shopping for the lowest fees and expense ratios a smart wayto select mutual funds? Not always. The answer depends on thetype of mutual fund you are evaluating, the time you can devoteto evaluating and managing your investments, andthe type of cost incurred.

Investing in the Best No Load Index Mutual Funds.

If you believe markets are generally efficient and prefer toinvest in an index mutual fund to achieve an index-like return,shopping for the best index mutual fund based on low fees and alow expense ratio makes good sense. The portfolio manager of anindex mutual fund endeavors to invest the fund’s assets to trackthe index as closely and cost-effectively as possible. Largerindex funds have an advantage in that they can spread theiroperating costs over a larger asset base.

Some of the interesting index mutual fund options currentlyavailable include no load index like E*Trade S&P500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index Fund(Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX)with expense ratios of 0.09%, 0.10%, and 0.18%, respectively.

Investing in Actively Managed and Strategies.

Mutual fund fees and expenses are just one of several importantfactors to consider if you believe portfolio managers can addvalue and out-perform the index through active management. Theportfolio manager’s ability and investing style are just asimportant. Therefore, seeking out the best mutual fund based onjust low fees and a low expense ratio may not always be theright approach. It may just be a case of being ‘penny-wise andpound-foolish’.

Legendary investor Peter Lynch, who managed the FidelityMagellan Fund (Nasdaq: FMAGX) from 1977 to 1990, achievedreturns well in excess of the market averages even afteraccounting for the fund’s fees and expenses.

So too has Bill Miller who currently manages the Legg MasonValue Trust (Nasdaq: LMVTX). Even after accounting for itsrelatively high 1.7% expense ratio, this no load mutual fund hasachieved compound annual returns of 18.6% for the 10 year periodending in 2004, well in excess of 12.0% for the Vanguard 500Index mutual fund.

AlphaProfit, an investment research firm that specializes inactive sector investing, uses the no load Fidelity Select Fundsto implement its investing strategy through its Core™ and Focus™model portfolios. Although not the lowest, the expense ratio ofthe no load Fidelity Select Funds compares favorably with thatof other sector fund offerings. AlphaProfit prefers FidelitySelects for their comprehensive coverage of sectors and industrygroups. The AlphaProfit model portfolios have significantlyoutperformed the market averages over time.

Ensuring Your Mutual Fund Puts Your Interest First.

Whether you prefer to index or take an active approach tomanaging your investments, ensuring that your mutual fund isputting your interests first is good investing practice.

Mutual funds charge different types of fees. By looking at somekey factors pertaining to fees, you can get a sense of whetherthe mutual fund puts your interests first or merely seeks toline the mutual fund company’s pockets.

Serving the Interests of Long-Term Shareholders. Some mutualfunds impose short-term trading fees to discourage frequenttrading of mutual fund shares. Frequent trading disruptsefficient management of the mutual fund and increases operatingexpenses. A short-term trading fee can therefore actually bebeneficial to long-term shareholders if the fee is rightlytreated by the mutual fund company.

Fidelity Spartan Total Market Index Fund (Nasdaq: FSTMX), forexample, follows the practice of returning short-term tradingfees collected on shares held less than 90 days to the mutualfund itself rather than passing on the benefit to the mutualfund company. By having this short-term trading fee structure,this no load mutual fund seeks to contain its operatingexpenses. Such fees are therefore aligned with the interests oflong-term

THE NO LOAD MUTUAL FUND TRACKER
Do you have a question regarding your mutual fund investments? I will always give you my unbiased and honest opinion. How can you be sure? First, this is a free newsletter and it will not affect my renewal rates. Second, I am not running for office and do not have to hide my thoughts in evasive language designed to obscure what I really mean.

shareholders of this mutual fund.

Passing on Savings from Scale Economies. The operating expensesincurred by a mutual fund are a combination of fixed andvariable costs. As the assets of a mutual fund increase, thefixed cost gets spread over a larger asset base. Therefore, theexpenses incurred to operate the mutual fund as a percentage ofthe fund’s assets should trend lower.

A mutual fund that places the interest of shareholders firstmust pass on the savings from scale economies to shareholders.The trend in a mutual fund’s expense ratio therefore serves as ametric of how seriously a fund takes its fiduciaryresponsibility.

Key Points.

• If you are searching for the best no load index mutual fund,shopping for one with low fees and expenses makes perfect sense.• If active management of investments appeals to you, fees andexpenses are just one of several important factors to consider.The ability and investing style of the portfolio manager are atleast just as important as fees. • The types of fees a mutualfund charges and how the fund uses the fees provides clues as tohow seriously a mutual fund takes its fiduciary responsibility.Mutual funds that impose fees to contain operating expenses andreturn fees to the mutual fund help protect the interests oflong-term shareholders. • that put theshareholders’ interests first typically pass on savings fromscale economies to the shareholders.

Notes: This report is for information purposes only. Nothingherein should be construed as an offer to buy or sell securitiesor to give individual investment advice. This report does nothave regard to the specific investment objectives, financialsituation, and particular needs of any specific person who mayreceive this report. The information contained in this report isobtained from various sources believed to be accurate and isprovided without warranties of any kind. AlphaProfitInvestments, LLC does not represent that this information,including any third party information, is accurate or completeand it should not be relied upon as such. AlphaProfitInvestments, LLC is not responsible for any errors or omissionsherein. Opinions expressed herein reflect the opinion ofAlphaProfit Investments, LLC and are subject to change withoutnotice. AlphaProfit Investments, LLC disclaims any liability forany direct or incidental loss incurred by applying any of theinformation in this report. The third-party trademarks orservice marks appearing within this report are the property oftheir respective owners. All other trademarks appearing hereinare the property of AlphaProfit Investments, LLC. Owners andemployees of AlphaProfit Investments, LLC for their own accountsinvest in the Fidelity included in the AlphaProfitCore and Focus model portfolios. AlphaProfit Investments, LLCneither is associated with nor receives any compensation fromFidelity Investments or other mutual fund companies mentioned inthis report. Past performance is neither an indication of nor aguarantee for future results. No part of this document may bereproduced in any manner without written permission ofAlphaProfit Investments, LLC. Copyright © 2005 AlphaProfitInvestments, LLC. All rights reserved.

About the author:Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfitInvestments, LLC. He edits the AlphaProfit Sector Investors'Newsletter™. For the 5 year period ending December 31, 2004,during which the Dow Jones Wilshire 5000 Total Market Indexdeclined 6.9%, the AlphaProfit model portfolios increased by upto 186.2%. To learn more about AlphaProfit and to subscribe tothe FREE newsletter, visit http://www.alphaprofit.com .