Transcripts

"Of Mutual Interest,"-John Waggoner, Mutual Fund Columnist at "U.S.A. Today."

SUSIE GHARIB: In tonight's "Of Mutual Interest," commentator John Waggoner wants to make sure there are no nightmares lurking in your portfolio. He's mutual fund columnist at "U.S.A. Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: You may think that your mutual fund is a little angel, but are you sure your fund doesn't have a hidden dark side? Today, were going to talk about three ways to make sure you don't have a devil of a fund. First, check out your fund's turnover ratio. That figure may be buried deep inside your prospectus. Turnover measures how often a fund trades its stocks. A fund that has a 100 percent turnover, about average, trades away its entire portfolio in a year. All that trading will rack up costs over time, weakening your fund's returns.

Now, look at your fund's expense ratio. All funds charge expenses, but the more you give to your fund, the less you have for yourself. You shouldn't have to pay more than 1.2 percent for a large company U.S. stock fund or more than 1 percent for a bond fund. Some funds charge as much as 2 percent a year and those funds will just bury your returns alive. A fund with high turnover and high expenses is just bad to the bone.

Finally, some funds dole out taxable dividends and gains like they were candy this time of year, but those distributions aren't a gift; you'll owe taxes on them. If the fund has turned in red-hot performance, you can probably expect a big distribution. That's the nature of the tax law. But funds that routinely pay out big tax distributions aren't keeping shareholders' best interests in mind. Look for a fund that manages its portfolio to keep taxes low or invest in a fund through a tax-deferred retirement account. Most funds are on the side of good, not evil, but heavy trading, high expenses and big distributions can turn the best fund into a nightmare. I'm John Waggoner.