If you took a vote among investment professionals on the single most important investment quality to look for in a mutual fund, the result would readily confirm Mr. Bogles position, which he has championed since he founded the Vanguard Group. Simply stated, costs reduce investment returns. While it is impossible to eliminate all fund-related expenses, it is possible, and necessary in this decades low-return investment environment, to avoid some and minimize others. (To read more about John Bogle, see The Greatest Investors: John Bogle .)

So lets take a comprehensive look at all the costs and expenses associated with mutual fund investing and pinpoint key indicators in a funds expense structure that will score high in a Fund Investment-Quality Scorecard and lead you to top performing, low-cost mutual fund investments.

There are essentially four major components of a mutual funds overall cost structure: sales charges, expense ratios, transaction commissions and redemption fees. An understanding of what these costs are and how they impact a funds performance is extremely important in making informed fund investing decisions.

Sales Charges

Among other distinguishing features, mutual funds are acquired with a sales charge (load) or without a sales charge (no load). If there is a load, the charge can be as high as 8%, although it seems that a 3-5.75% range is most common. This charge is paid by the investor (the buyer of the fund) to the seller (a financial intermediary such as a brokerage firm, insurance company, financial planner or investment advisor) for services rendered. The charge is deducted from the amount being invested.

No-load mutual funds are offered directly to the investing public by fund companies, or they are sold to investors by financial intermediaries who have a compensation arrangement (hourly, flat fee or a percentage of assets) with the purchaser. In this case, a sales charge is not involved, and the investor fully invests his or her available money into funds sponsored by a no-load fund company. (For more insight, read The Lowdown On No-Load Mutual Funds .)

There are five general aspects of the load/no-load debate worth considering:.

1. Fund investors definitely need to understand that a load is a selling commission paid to a financial intermediary and not the fund company. It does not buy increased investment expertise by fund management. On the other hand, financial intermediaries defend their fees as fair compensation for the investment advisory services they provide to the investor.
2. The load-fund business has complicated things for investors by confusing them with a variety of fund share classes: A, B and C. In brief, these simply represent three different ways of applying a sales charge. With A shares you pay up front and with B shares you pay at the back end. With C shares, called level-load, the year-to-year costs are usually high but spread out over time. (To learn more, see The ABCs Of Mutual Fund Classes .)
3. A funds load is not included in the computation of a mutual funds expense ratio (see below) and, therefore, is an additional cost to be considered when investing in load funds. (To learn more, see Stop Paying High Fees .)
4. The long historical record on mutual funds shows that there is little difference in the total return performance of load and no-load funds.
5. Employee participants in a defined-contribution, company sponsored retirement plan, such as a 401(k) and the like, generally need not be concerned about loads. In most instances, these retirement plans waive any sales charges on their fund investment options.

Expense Ratio

A mutual funds expense ratio is the result of a calculation as opposed to a type of expense. The ratios numerator is the sum of a variety of administrative and operating expenses; its denominator is an average of the funds assets. It is expressed as a percentage lower is better and is a key indicator of a funds investment quality.

In general operating terms, stock funds are more expensive than bond funds, international funds are more expensive than domestic funds and small and mid cap funds are more expensive than large cap funds.

The largest component of a funds operating expenses is the fee paid to its investment advisors, or managers. A fund must also pay for recordkeeping, custodial services, taxes, legal costs and accounting and auditing fees.

In addition to these conventional operating expenses, some funds also have a marketing, or distribution, fee commonly referred to as a 12b-1 fee. If this fee is charged, it is included in a funds operating expenses, unlike a funds sales charge, which is not considered an operating expense. In the mutual fund industrys early days, a provision in the regulations permitted funds to incur promotional expenses to help develop mutual fund activity. The maximum 12b-1 fee allowable is an annual 1% of a funds assets. To be considered a no-load fund, the 12b-1 annual charge must be no more than 0.25%.

Many mutual fund observers find it hard to justify this type of fee. With the increasing popularity of mutual funds, how much more promotion is really necessary? Today, the 12b-1 fee is used almost exclusively to reward intermediaries for selling a funds shares. There is a movement underway to eliminate the fee, but the fund industry as a whole is resisting the change.

Lastly, it seems that some mutual fund investors are not all that clear on how operating expenses are paid. The simple answer is that whatever is included in a funds operating expense is charged against the assets under management. In other words, the funds investors pay the tab. This is how costs reduce investment returns.

Invisible Charges

Investment experts have speculated that brokerage commissions can add as much as 0.15% to a funds annual expenses. However, these costs are not included in a funds expense ratio. They seem to fit the definition of an operating expense but, as of today, are not so considered.

Redemption Fee

Designed to discourage market timers, an increasing number of mutual funds are charging a flat fee, usually 1%, on withdrawals (shares redeemed) made within a certain time frame. Generally, redemption fees are in effect for one year or less following the date of the investors initial purchase. If you are an investor (in for the long term), as opposed to a speculator (in and out for the short term), this type of fee will have no effect on your fund investment.

Also remember that a mutual fund is a business and seeks to return a legitimate profit to its owners. The fund business is a very profitable one. As such, investors should seek out those funds that run a lean operation and align their interests with those of investors for a win-win relationship.