How much will it cost -- what are the fees and expenses?
The average actively-managed fund carries an expense ratio of 1.31%, while the average index fund costs 0.74%, according to Morningstar. But paying the average doesn’t necessarily mean you’re getting a good deal. You can get the most bang for your buck with broad-market index funds: the Vanguard Total Stock Market Index, an index fund that tracks an index (MSCI US Broad Market Index ) representing the entire U.S. stock market, carries an expense ratio of 0.19%. Meanwhile, the Fidelity Spartan Total Market Index, which tracks another index that represents the entire stock market, is even lower at just 0.10%.

Don’t forget to look for no-load funds, or those without any sales charges (in addition to the expense ratio, of course).

Are there any loads?
Loads are something you want to avoid. And there are a lot of no-load mutual funds out there that can help you do just that.

A load is sales charge attached to the purchase or sale of a mutual fund – and it usually goes towards paying the financial professional involved in the transaction, like a stockbroker. If a broker is selling a fund, it’s most likely a load fund.

A “front-end load” is charged when you buy shares of the fund, whereas a deferred, or “back-end load,” is levied when you sell your shares. Back-end loads may gradually decline and disappear the longer you hold the fund, but another type of sales charge typically offsets that.

The average front-end load clocks in at 5.01%, while the average back-end stands at 4.67%, according to Morningstar. There’s no need to fork over that kind of money, unless you’re certain that paying it is cheaper than some other way of compensating the person who’s giving you investment advice.

Will you explain the different share classes and the fees to me?
Fund companies identify the different load arrangements as A, B, or C shares. For instance, A shares typically charge a front-end load. (Class A shares are often used inside 401k plans, but fund companies generally waive the load). B shares usually charge a back-end load if the shares are sold before a certain time period elapses, as well as a 12b-1 fee, which is another type of fee explained below. C shares usually charge a higher 12b-1 fee, but no loads. The various classes don’t end here either. Fee structures may also differ across fund families.

Confusing, no? That’s why it pays to call the 1-800 numbers and ask for specifics if you’re unsure of what kind of sales charges you’re paying.

If you don’t have much money to invest (many funds that don’t require a large initial investment charge loads), look for “no-load” funds with an automatic investment plan. Some fund companies will give you a break and require lower minimums (or none at all) for people who commit to making regular monthly investments. Again - you should always try and find a no-load option.

How is the fund’s track record?
Be sure to check out the fund’s historical performance. But keep in mind that past performance isn’t necessarily an indicator of future performance. Look at the funds’ 3-year, 5-year and 10-year records. Also check out how the fund has weathered downturns in the market (you can tell when the downturns were by comparing the fund against the benchmark it’s supposed to track).

You also want to find out how long the fund manager has been running the fund (the longer the better) and what kind of reputation the fund company has.

Are there transaction fees associated with the funds I’m interested in?
If you’re looking to buy funds outside of your employer-sponsored 401k, you need to pay close attention to transaction fees.

Fund supermarkets are a one-stop shop for buying mutual funds. Mutual fund companies like Vanguard and Fidelity, as well as brokerage firms like Charles Schwab, all offer their own fund supermarkets.

While supermarkets do provide the convenience of one-stop shopping, one statement and easy online access, some funds carry transaction fees – these are akin to a brokerage commission. So if you invest a little money each month into three funds that carry a $35 transaction fee, those costs can quickly add up and eat into your returns.

Obviously, the supermarkets want you to buy their home-cooked brands, so those funds are unlikely to cost you any extra fees. You can be sure it’ll cost you less to buy Schwab funds through your Schwab brokerage account that it would to buy Vanguard’s funds.

Supermarkets usually have a list of no-transaction fee funds (these fund companies pay the supermarket a fee to get on the list, so it’s not entirely free: the expense ratio might be slightly higher) and transaction fee funds (those who don’t). Before you commit to any one supermarket, check out their wares and fee structure. If the Vanguard fund you’re after will cost a fee every time you make a deposit, look elsewhere or go to the fund company directly.

When will the fund’s next taxable distribution be?
You want to ask this question only if you’re investing outside of a tax-deferred account, like a 401k or IRA. Why? Funds are required to distribute capital gains and dividends to shareholders. These distributions are taxable – so if you buy into a mutual fund right before a distribution, you’re essentially paying taxes for some sort of gain that you didn’t even benefit from.

While most distributions are made in December, some are made earlier. If you’re looking to buy a fund anytime after Sept. 1, be sure to ask the company when the distribution date is --- if there is a taxable distribution, make your purchase after it passes.

Where can I find the fund’s prospectus?
This is the official document which describes the fund in detail. A fund company must send it to anyone who asks for it, current investors or those who are just curious. They’re also usually available on the fund company’s website. It’s not exactly riveting reading, but it contains important information such as the fund’s investment objective, policies, risks and fees. Read it – but have a cup of coffee first.

Do I have a choice about reinvesting dividends?
Often times you can choose whether you want to automatically reinvest the dividends paid out by the fund. By doing so, you can buy more shares. If you’re investing in a retirement account like an IRA, go ahead and reinvest -- it’ll help you reach your retirement goals that much faster. The alternative, after all, is to have those dividends sitting around in some kind of cash investment, which almost certainly won’t do as well over time as money you put into a stock mutual fund.

Things get more complicated if you’re investing in a regular brokerage account. If you decide to reinvest, you need to keep careful records of those reinvestment purchases in order to avoid being taxed twice (once on the dividends and again as a capital gain when you sell shares of the fund). To simplify matters, you might have your dividends pour into a money-market account and decide what to do with the money then.

Want to Know More?

• What's a Mutual Fund?
• How to Choose a Mutual Fund
• How to Invest in a Mutual Fund