Over the past 30 years, mutual funds have risen to prominence as individuals have taken on more responsibility for retirement saving and other investing goals. Mutual funds pool the money of people with similar investment goals. All mutual funds have a them preserving capital, increasing current income, maximizing long-term growth, or combining growth and income. There are other goals too-even socially conscious investing.

Mutual funds are run by managers who spend their days examining various companies, securities, and other investments for hidden value. Investment theorists argue that professionally managed mutual funds have two big advantages over the holding of individual investments. Funds offer diversification because they feature a wide variety of holdings, not just one. Also, they offer liquidity, since with a phone call, you can cash in your investment at will. However, many experts argue that funds have their problems. Professional management doesn’t always mean good management, because some very highly paid managers don’t pick very well. On top of that, they charge fees- management, marketing, and otherwise that can significantly eat into your profits or further a loss.

Types of Funds

Your first exposure to mutual funds was probably in your company 401(k) or your organization or agency’s 403(b) plan. Funds are also a key component in self-directed IRAs. People in these kinds of plans are given a choice among several major fund categories:

1. Stock funds. These funds obviously own stocks of companies, and the funds tend to be classified by the size of the companies they own. Large-cap funds tend to be the biggest companies out there while small-cap funds are young firms poised for growth.
2. Bond funds. These funds are invested in bonds of governments or companies, and are also divided into various categories based on the bonds’ structure. Unless the fund is invested in high-risk bonds, bond funds tend to be a fairly conservative investment choice.
3. Balanced funds. These funds typically mix stocks and bonds to act like an individual portfolio designed for maximum diversification based on the individual’s life stage. lt is important to examine whether the fund manager’s idea of balance fits your investment strategy.
4. International/global funds. These funds invest in overseas companies, sometimes in a mixture with U.S. companies of similar type. These funds can be more volatile based on where the companies are located, but they can offer the potential for more growth when U.S. stocks are stagnant.
5. Sector funds. Have a favorite industry? You can invest in a sector fund and focus on companies in that industry alone. People who invested in technology funds in the late 1990s were very happy, but when 2000 rolled around, they became very sad. The right bet in a sector fund can be very rewarding; the wrong one reminds us all why we should never put all our eggs in one basket.
6. Index funds. For many people, the decision to buy an index fund was a good one in a hot market and a relatively safe one in a bad market. Index funds try to buy representative amounts of stock in a particular index with the goal of matching the overall market step-by-step.

Because what they do isn’t terribly complex, their fees tend to be lower than most funds, and thus can represent a better value for investors.

Getting a Grip on  Fund Fees

Mutual funds charge management fees, and investors need to be aware of what they are before they put their money down. That’s why you need to read the prospectus or check a reputable source like www.Morningstar.com. The key issue here is the expense ratio, an amalgam of different fees charged by the fund. It includes:

• The investment advisory fee or management fee. This fee is used to pay the manager or managers of the fund. Fund managers generally do pretty well. This fee is about 0.5-1 percent annually of the fund’s assets. The bigger the fund, whatever the percentage of the management fee, the more the manager or managers make.

• The 12b-1 fee. This is a marketing fee that gets a lot of heat. If you can find a well-performing fund without one, buy it.
• Administrative cost. Mutual funds have record keeping expenses and other charges tied to keeping customers informed about how their fund is doing. The most cost-conscious funds keep these expenses below 0.2 percent.
• Morningstar and other resources can help you determine the expense load-an overall number-for your fund and whether it’s high or low within the category of funds you want to invest in.

Other Fees that Cost You Money

Load. This is a sales charge separate from what we discussed above. A load is a sales charge paid by the investor to compensate brokers who sell you the fund. If you’re investing in the company 401(k), ask your human resources person what they’re doing to limit fees that are passed on to your fellow employees. If you’re investing by yourself, aim for quality “no-load” funds that are sold directly to the consumer. There are key loads to watch for:

• Front-end load. These are pretty steep-often around 5 percent.
• Back-end or deferred load. These are charged when you sell.
• They’re also known as B shares.
• Level loads. These funds charge an initial load that is typically smaller than annual loads charged thereafter.

How to Buy Mutual Funds

Most mutual funds today can be bought directly unless you are buying from retirement accounts already set up at established brokerages. Then you’ll have to pay their commission on top of any fees the mutual fund typically charges new investors. Do everything you can to buy direct.