Although mutual funds provide diversification, there are no guarantees that your invested money will not decline. You can only increase the odds of your investment success by not investing in funds that cost too much. Costs are the biggest problem with mutual funds and some funds give you more for your money than others. The charges you pay to buy or sell a fund, as well as the fund operating expenses eat into your return, and they are the main reason why the majority of funds underperform the market.  Since fees are deducted from your investment, all other things being equal, no-load fund is preferable to a load-fund. Because the loaded funds  reduces the size of your invest, you earn less in a load fund over time than you would by placing the same amount of money in a no-load fund that produced the identical performance record.

There are two kinds of fees:
1. Loads (commissions to buy and sell)
2. Operating expenses (Ongoing yearly fees)

1. Loads - Loads are just fees that a fund uses to compensate brokers or other salespeople for selling you the mutual fund. Loads typically range from 3 percent to as high as 8 percent. Because commissions are paid to the salesperson and not to the fund manager, the manager of a load fund does not work any harder than the fund manager with no loads.

• Front-end loads - These are fees are paid when you purchase the fund. If you invest $10,000 in a mutual fund with a 4% front-end load, $400 will pay for the sales charge, and $9,600 will be invested in the fund.

• Back-end loads - You pay this fee when you sell shares in the fund. It's also know as redemption fees and contingent deferred sales load. Typically, the charge, which is a percentage of the value of the assets you have in the fund, applies only during the first few years you own your shares. In most cases, too, the percentage you pay declines each year during that period and then is dropped. A typical example is a 5% back-end load that decreases to 0% in the sixth year. The load is 5% if you sell in the first year, 4% in the second year, 3% in the third year, etc. If you don't sell the mutual fund until the sixth year, you don't have to pay the back-end load at all.

2. Operating expenses - All mutual funds charge ongoing fees and the expense ratio. The fees pay for operational costs of running a fund (employees' salaries, marketing, mailing material, etc.). A fund's expenses are quoted as an annual percentage of your investment and deducted before you're paid any return. You can find fund's operating expense s in the fund's prospectus. Look in the expense section and find a line that says "Total Fund Operating Expenses". Here are the costs that are in the total operating expenses.

• Management fee -This is the cost of hiring the fund manager(s), this cost is between 0.5% and 1.0% of assets on average. While it sounds small, imagine a mutual fund with 1% fee and $200 million in assets, that's $2 million in management fee. It's true that paying managers is a necessary fee, but don't think that a high fees goes hand in hand with superior performance.

• Administrative costs - These include necessities such as mailing statements, record keeping, customer service, accounting fees, computers for tracking investments, and so on.

• 12B-1 Fee - Some load and no-load mutual funds levy 12b-1 fees on the value of your mutual fund account to pay brokerage commissions an to offset the fund's promotional and marketing expenses. These asset-based fees,  typically amount to somewhere between 0.5% and 1% annually of the net assets in the fund. A fund that charges 12b-1 fees must detail those expenses, along with other fees it imposes, in its prospectus. So if you invest in a fund with a 12B-1 fee, you are paying for the fund marketing and advertising expenses to sell itself for it's own benefit!

On the whole, expense ratios range from as low as 0.2% for index funds to as high as 2.0% for a international or specialty funds. The average equity mutual fund charges around 1.3%-1.5%. You'll generally pay more for specialty or international funds because they require more research and expertise from managers.

Performance History Record - Another factor to consider when selecting a mutual fund is its historic rate of return compare to market as a whole, and relation to other funds of its type.  When picking a fund, compare its performance and volatility over an extended period of time to a market index, depending on the fund's objective. For example, you will use Standard & Poor's 500 index if the fund you are selecting invest in large U.S. companies. Do not pick funds based on 1 to 3 year return. History has shown that many winners of yesterday can turn into losers fast (case in point: technology funds of the past few years). In order for a fund to be considered a great fund, it must consistently deliver a decent return with a appropriate degree of risk for a long period of time (about 10 to 15 years).

Tax Consideration - You can not overlook the tax implications of your non-retirement accounts.  There is a big difference between the before-tax and after-tax return generated by stock mutual funds. All mutual funds buy and sell stocks during the course of a year and any gain or loss from those securities must be distributed to fund shareholders in the form of capital gains. Mutual funds also produce dividends that may be subject to higher income tax rates for some investors. Both capital gains and dividends are taxable distribution, as such, more taxes you have to pay. Choose a mutual fund that minimize taxable distribution helps you to defer taxes on your profits. You receive a higher rate of return on investments by allowing your money to compound (grow) as it would in a retirement account. Most mutual funds distribute capital gains in December. It's a good idea to delay purchasing until the capital gains is distributed. You can find out the distribution date by calling the 800 number of that specific fund.

**Highly Recommended Reading**

Morningstar's Guide to Mutual Funds This book offers explanations on proper and true diversification, rates and risk of return, asset allocation, and appropriate risk based upon one's attitude, age, and stomach. It tells one how to look at how a particular fund operates and what it's invested in. Terms such as diversification, dollar-cost averaging, and the fact that past performance is no guarantee of future results are usually known to those who've followed mutual funds already. It is good to understand and calculate the true "cost" of a fund. It will primarily benefit those who are new to mutual funds or those who want to increase their general knowledge.

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