The trouble with fees: how can you protect your portfolio from the rising cost of mutual funds? (Mutual Fund Focus).

As the stock market continues to spiral downward and investor losses mount, mutual fund fees have found a way to continue to rise. So much so that Financial Services Committee Chairman Michael G. Oxley and Capital Markets Subcommittee Chairman Richard H. Baker have called upon the Securities and Exchange Commission to determine what, if anything, can be done to protect the more than 95 million Americans who own mutual funds.

But you won't want to wait until the government takes action to save your portfolio from continued abuse. On average, an investor pays 1% to 2% in expense ratio fees, which include management fees, 12b-1 fees, and fees for general operating costs such as fund Websites, semiannual reports, and 800-numbers.

In a market that has produced negative returns for the last three years, an additional 1% to 2% loss is hardly good news for investors. Ruben Gregg Brewer, manager of mutual funds research at Value Line Corp. in New York City, says investors need to understand all the fees associated with each fund before they buy. "Investors should keep in mind that when you purchase a mutual fund, you are purchasing a service, and it is essential to know that what you are paying for is worth it," says Brewer. "If a fund wildly outperforms the market then an extra 25 basis points you may pay in fees is worth it. But if the fund is only mildly better, opt for a fund with a lesser fee."

If investors are interested in keeping costs down, Brewer suggests buying the fund directly or purchasing a no-load fund, which has a management fee but no initial sales charge. Another way to lower mutual fund fees is to choose index funds, which have lower fees than actively managed funds because they are passively set to mimic the market. Brewer believes index funds are a good choice because most fund managers don't outperform the market. In particular, Brewer recommends the Vanguard Balanced Index funds, which are made up of 60% equity and 40% bonds with an expense ratio of .22%.

For investors who currently hold funds that have high expense ratios and are not living up to expectation, Brewer suggests reallocating money to a less expensive fund. He cautions, however, "expense ratio in and of itself is not a reason to buy or sell a fund. Investors should take a holistic approach to purchasing a fund, considering three points: expense ratio, performance, and how the fund fits into your investment approach."

Oxley feels the problem of high fund costs lies in the confusing array of fees and the mutual fund company's failure to disclose those fees in a way that the average investor understands. To fix the problem, the SEC has proposed regulations to reform reporting requirements for mutual funds that would require funds to disclose their complete portfolio holdings quarterly, rather than semiannually. But Oxley and others doubt these measures will cause mutual fund costs to decrease.

Top, Low-Expense-Ratio Mutual Funds

Fund Name (Ticker)          3-Year    Expense                 Minimum
                            Return *   Ratio   Phone Number  Investment

Vanguard Wellesley Income
 Investor Fund (VWINX)       10.24%    0.30    800-662-2739    $3,000
Berwyn Income Fund (BERIX)   10.09     0.68    800-992-6757     3,000
Dodge & Cox
 Balanced Fund (DODBX)        8.25     0.53    800-621-3979     2,500
Dodge & Cox Stock
 Fund (DODGX)                 6.11     0.54    800-621-3979     2,500
Vanguard Wellington
 Investor Fond (VWELX)        4.09     0.34    800-662-2739     3,000

* AS OF MARCH 21, 2003. BASED ON TOTAL ANNUAL RETURN

SOURCE: VALUE LINE