Lower Cost Funds Tend to Perform Better

penny pincherWhen you’re deciding where to invest your money, the natural instinct is to go for the best possible mutual funds—the ones ranked 4 or 5 stars by Morningstar. But it turns out you should pay just as much attention—maybe even a bit more—to cost.

That’s right, bargain lovers, even when it comes to your investments. cheaper is often better.

Morningstar studied the performance of thousands of funds over five years and found that those with lower expense ratios (what you pay for the fund’s management) were generally the best bet. Fees eat into returns, so a fund with higher costs needs to work harder to outperform its cheapskate peers.

Obviously low fees aren’t the only criteria that matter. Star ratings (which track performance) are important – as are other factors like the management team and whether you need to pay a commission to buy the fund (a “load”).

But if you put low costs at the top of your shopping list, you’re giving yourself a competitive edge. It’s a powerful message for the consumers in all of us.

Buy low: Are you surprised that a fund’s fees can be a key indicator of performance?