YOUR MONEY: Mutual fund expense ratios are on the rise

If we needed another knife in our gut as the result of the recent economic turmoil, the mutual fund industry has sharpened theirs in an effort to survive. But their knife is not cutting - it's raising the cost of funds to investors.

A recent review by Morningstar, a company that tracks mutual funds, has found expense ratios are on the rise in 2009. While they were flat in 2008 over 2007, funds have already begun raising them in 2009. U.S. stock funds are seeing the biggest increases while bond funds and international stock funds are steadier.

Morningstar blames it on fund assets falling as a result of the recent stock freefall. Fund assets were down $8 billion to $5.9 trillion in February 2009, Morningstar reported. With lower assets, the fee collections based are also lower, hurting the profitability of the fund companies. Morningstar even drew the conclusion that some funds are trying to hold up profits to make them more attractive so another company will buy them.

The expense ratio is the percent investors pay in fees, although those fees are deducted from returns. For example, an expense ratio of 1.0 means $100 is deducted from returns for every $10,000 in the account. If the fund has a loss, the expense ratio makes that loss deeper.

If you own a mutual fund, check your expense ratio and compare it to last year to see if your fund is costing you more. Even low-cost fund giant Vanguard has raised expense ratios on some funds. Don't expect the fund to always inform you of the change. As a Vanguard investor, I did not know about the increase until Morningstar reported it, although Vanguard had issued an announcement that I later found.

You can avoid the fee creep from the funds by looking elsewhere at lower-cost index funds. Look even further by moving into exchange-traded funds, which are like mutual funds but trade on an exchange like individual company stocks. While an ETF can have an expense ratio of 0.1, it does charge a trading commission each time it is bought or sold. Therefore, ETFs can be costlier if you are making frequent investments or withdrawals. An ETF exists in almost every asset class, making it possible to have just as diversified a portfolio as using funds, or even more diversified by using specialty ETFs.

Like other things we buy, watch the price tag of funds. Investing does come with a cost and it is up to you or your financial planner to make sure you are getting the best investment at the best price.

(Serra is a financial planner with Strategic Financial Planning Inc. in Plano, Texas. E-mail him at serrafinance@yahoo.com.)

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