A mutual fund’s fees and expenses may be more important than an investor might realize. Ads, rankings and ratings will often emphasize how well a fund has performed in the past. But according to the Securities and Exchange Commission (SEC), studies show that the future often is different. Fees and expenses can be a reliable predictor of mutual fund performance.

When considering a mutual fund, one of the most important numbers is the expense ratio, which tells you how much the fund costs. The ratio shows how much of the fund’s assets are paid to the portfolio manager and for other operating expenses. Typically, a fund pays an average of 1.5 percent of assets annually.

Three things typically figure into this ratio. The investment advisory fee pays the managers of the fund, which accounts for .50 to 1 percent. Then, administrative costs cover services such as record keeping, mailing and maintaining a customer service line, which can range from .20 to .40 percent. And often a fund will charge a 12b-1 distribution fee, which covers marketing, advertising and distribution services. This ranges from .25 percent to 1 percent of assets.

The upper range of these fees shows how high an expense ratio can be. And even though the fee seems to be just a few percentage points, it is charged in down years, when it can represent a significant slice of the return. Also, over time, the fee can cut the ultimate return by nearly 50 percent, according to one analysis. With an initial $10,000 invested after 30 years of 10 percent returns (a bit optimistic, perhaps), the fund has made $174,494, but with a 2.5 percent expense ratio, it has lost $86,944, according to an analysis by Moolanomy.com.

But even that isn’t the bottom line. There are still transaction fees incurred by the buying and selling of assets in the fund that go unreported, and that can double or triple the cost, according to Richard Kopcke of the Center for Retirement Research at Boston College.

Of the 100 largest stock funds held in defined contribution plans as of December 2007, trading costs averaged from 0.11 percent of assets annually in the quintile with the lowest costs to 1.99 percent of assets in the quintile with the highest costs, with a median of 0.66 percent, Kopcke found. But it is difficult for average investors to determine this percentage, he said.

The SEC has not been able to develop ways to report this percentage in the same way an expense ratio is reported, partly because fund managers say the number is too difficult to determine. One way to get an indication of the percentage is the fund’s turnover. The percentage of turnover shows at what rate stocks in the fund have been replaced. A high turnover rate would mean more fees.

The SEC last year required fund managers to disclose one year of turnover at the front of a prospectus in addition to the already required five years of turnover disclosed in the financial highlights section, according to a March 1 Wall Street Journal article. Turnover of more than 100 percent can indicate trading costs may be high, the Journal reported.

                        

Consider Roth IRA assets. By keeping assets inside a Roth IRA, they can grow tax free for retirement. Also, this year people can convert traditional IRAs to Roth IRAs. Account holders are no longer subject to the $100,000 modified adjusted gross income limit. With conversions that occur in 2010, they can also split their conversion amounts equally and report them as income for tax years 2011 and 2012.

Take advantage of tax-deferred retirement accounts. If you have a 401(k) or other employer-sponsored retirement plan available, contribute as much as you can afford to contribute. By increasing contributions every time you get a raise, you can increase your savings. The plans are basically funded with pretax dollars, which will reduce taxable income. Also, that money will grow tax free until it is withdrawn. If the contribution is to a Roth IRA, it is made with post-tax money, so the funds can be withdrawn tax free after the age of 59½.

Consider a 529 college savings plan. The annual $13,000 gift would go a long way toward the amount needed to save for education expenses. Contributors may also be eligible for a state tax deduction or credit. They can also take advantage of a special five-year accelerated gifting provision, which is $65,000 in one year per contributor. That covers the current year and the next four years.

Hold assets more than a year. Any capital gain made within a year is considered taxable income, like a salary. But gains taken after a year are considered capital gains, which in 2010 is taxed at the maximum rate of 15 percent. The capital gains rate is almost always lower than the income tax rate. Also, the capital gains rate is expected to go up to 20 percent next year, so some people are taking advantage by taking their gains this year.

Give to charity. Contributing to charities is always a good idea. But if you are planning a gift, it might be best to do it soon, because some in Washington have been looking at cutting back on charitable deductions as a revenue-saving measure.

                        

It is not just employees who have difficulty paying for the coverage. Many employers are still struggling in this economy and need to trim expenses wherever possible. In some cases, rather than dropping the coverage, companies will offer voluntary benefits. That means employees pay all the costs but get lower rates through a group plan.

Another option that reduces costs for employers is the discount dental plan. Such plans feature a negotiated discounted rate for typical services such as dental exams, fillings, crowns, root canals and cleanings with participating dentists. Discount dental plans allow savings in the range of 10 percent to 60 percent. Discounts for specialty care such as orthodontia or cosmetic dental procedures range from 15 percent to 20 percent.

That helps employees keep benefits, but total costs still fall to workers. Some employers that want to provide coverage and cut costs can split the difference with a hybrid plan. Hybrid dental plans combine the advantages of a discount plan with the flexibility of a traditional plan. Discounts are extended to members who receive care from an in-network dental provider at negotiated fees once insured benefits have been exhausted, or for adult orthodontia or cosmetic care, which may not be covered by the insured portion. The discount dental plan provides access to care at a reduced fee.

Premiums are often half the cost of a typical insured plan. In addition, the insurance company may not find it necessary to impose the typical annual plan maximum benefit of $1,000 to $2,000.

The legal and tax information contained in these articles is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice concerning your particular circumstances.

                        

Derivatives protect people from a change in prices of an underlying asset. They began, generally speaking, as a hedge against changes in commodities prices. So, if you are a corn farmer and want to be able to plan on how much you will receive for your crop, you can agree on the price with a miller. The farmer is in a sense betting that the price will be higher or at least the same as the rest of the market at harvest time, and the miller is betting that the price will be lower or at least the same – and the miller is ensured of a supply of corn. The result is stability for both parties. The agreement is derived from the underlying asset of corn. That is the essence of a derivative.

Derivatives also hedge against price changes in other financial instruments and can become far more complicated or “exotic.” An institution can buy a credit default swap (CDS), for example. Institution No. 1 would pay institution No. 2 to ensure that the value of an asset does not fall under a certain level. If the value does drop, then No. 2 would pay No. 1. When the value of real estate plummeted in 2007 and 2008, many No. 1 institutions were banging on No. 2 institutions’ doors to get paid. This was one of the factors leading to the economic collapse, when the overall value of the CDS market dropped from $62.2 trillion at the end of 2007 to $38.6 trillion at the end of 2008, according to the International Swaps and Derivatives Association.

Another factor was collateralized debt obligations (CDOs). These are packages of debts such as bonds or mortgage-backed securities. The idea is to reduce risk by spreading it around. But some in finance, such as Warren Buffett, said that they instead spread risky investments to more institutions. So when the underlying, or derived, asset plummeted, the rug was pulled out from under everyone.

Although some, like Buffett, had sounded the alarm on derivatives, many people were surprised by the enormous impact the instruments had on the financial sector in the collapse of September 2008. Regulators were also surprised, because derivatives are often unregulated because they are essentially an agreement exchanged between parties but amount to a $400 trillion market traded over the counter (OTC).

Financial reformers want to shed more light on the market, but on April 21, a Senate committee went even further than that and approved tough standards that would force banks to get rid of their swaps trading operations. That rule might not make it to the final financial reform package, but it is certain that the eventual law will clamp down on derivatives in some way.

                        

Once you start tallying up the federal, state and local taxes, you can see you have to be aware of how to mitigate the impact. One way is to choose a place to retire that does not have onerous state and local taxes.

For example, nine states have no state income tax, according to the Federation of Tax Administrators. They are  Alaska, Texas, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming. (In New Hampshire and Tennessee, income tax is limited to dividends and interest income.)

According to the Tax Foundation, the states with the highest tax impact are Maine, New York, Ohio, Minnesota and Hawaii. The ones with the lowest are Alaska, New Hampshire, Delaware, Tennessee and Alabama. The foundation also says that Americans will pay more in taxes in 2010 than they will spend on food, clothing and shelter combined. Another factor to consider, if you have a large inheritance to leave, is whether the state has an estate tax.

If you move, the good news is the tax impact of selling your home is less these days. That’s because Congress changed the rules in 1997. According to the book The New Retirement, by Jan Cullinane and Cathy Fitzgerald, “Some or all of the gain on the sale is not taxable as long as the taxpayers owned the house as their principal residence for at least two years during the five-year period ending with the date of the sale. The amount of gain that is not taxable is limited to $250,000 for a single taxpayer (or a single taxpayer limited separately) and $500,000 for a married couple filing a joint return. Significantly, unlike under the old law, this gain is eliminated from taxable income and is not deferred to reduce the tax basis of any replacement residence.”

Cullinane and Fitzgerald also wrote that the sellers do not have to buy a replacement principal residence, so it especially benefits those wanting to downsize.

                        

The law would require restaurants with 20 or more establishments to post the calorie counts on menu boards and next to each item in vending machines. The information will be similar to the information on food products bought at the supermarket. Restaurants were previously exempted from that law.

Some argue this is a key part of controlling obesity, because people are eating out more these days and are uncertain about how many calories they are consuming. In fact, the Center for Science in the Public Interest (CSPI) said children eat twice as many calories at restaurants than at home.

People might be shocked by some of the numbers. Consumers might not be surprised to find out the Guacamole Bacon Six Dollar Burger at Carl Jr.’s is 1,117 calories (more than half the calories a person should have in a day). But they might be shocked to learn that the double beef taco salad with dressing that they might have had at the Steak ‘n Shake has 1,051 calories.

Research shows people are not very good at judging calories on their own. A Cornell University study found that people make nearly 20 times more daily decisions about food than they are aware of — an average of around 250 each day.

Portion control is another practice the calorie information can encourage. At McDonald’s, for example, a small order of french fries is 210 calories. But supersize that and it’s 610 calories. Consumers might also be misled by the fixings. At Steak ‘n Shake, a junior order of fries is a mere 166 calories. But go for the chili cheese fries and you have consumed a whopping 1,279 calories.

In other words, the calorie labeling is sure to add a whole new dimension to the question, “Do you want fries with that?”

                        

The term means market capitalization – the market value of all of a company’s existing shares. It is basically a company’s shares multiplied by the current market price of one share. Investors gauge a company’s price by this rather than by sales or assets. It is also an effective way to see how the economic downturn of 2008 affected the financial world. The total market capitalization was as high as $57.5 trillion in May 2008, slid to $50 trillion in August and then went down to $40 trillion in September 2008, according to the World Federation of Exchanges.

There are no hard rules about the values of each designation. One gauge says small-caps are less than $2 billion in value, mid-caps are up to $10 billion and large-caps are more than $10 billion. Others say mid-caps start at $5 billion and small-caps start at $1 billion. And still others have added more categories: mega-caps, more than $200 billion; micro-caps, $50 million to $300 million; and nano-caps, below $50 million.

The size makes a difference in investor expectation. Small-cap stock values can grow or shrink quickly. The gain may be great, but so is the risk. These companies can grow into mid- and large-cap companies, taking investors along for the ride. But they also have less to fall back on when times are tough. They can drop in a hurry, again taking their investors with them.

Large-cap companies, which make up half of total market capitalization, tend to be steady in their performance. They are usually the companies that dominate their industry and are not likely to grow any more enormous by percentage, or to shrink, for that matter. These entities are often devoted to maintaining their position. So the investments are usually steady.

Mid-caps are considered a mix of small-cap and large-cap. They often have ambitions to grow into a large-cap, but that drive can also lead them to take risks. The companies are still substantial and are not likely to take ill-advised risks.

Investors should assess their risk tolerance before deciding to invest in stocks. Then they can determine which class of companies to put their money into. Many mutual funds specialize in different groups, so investors can take advantage of company size characteristics but spread the risk at the same time. The funds that track indexes such as the S&P 500 focus on large- or mega-cap companies, which offer stability and slower growth. They usually stumble only in significant downturns such as those after the 9/11 attack and the financial meltdown of 2008.

                        

The VAT is basically a national sales tax and is common in most other countries. France, for example, derives half its revenue from the VAT.

Although it looks like a sales tax, there is a key difference. The VAT is applied throughout the production and sales cycle as value is added to the product. Original producers charge a tax to manufacturers, who charge retailers, who charge consumers. Each tax can be deducted from the next tax, which is supposed to reduce the impact on the consumer. It is important not only because it spreads the tax throughout the production and sales system, but also because it  helps keep the end sales tax below 10 percent, which is considered the limit of consumer acceptance. Above that, according to economic theory, more people figure out ways to evade the tax.

This is generally how the VAT works in European countries, where it adds 10 percent to 20 percent to purchases, although not all at once. The taxes also can be assessed differently, so, for example, food could be taxed at a lower rate than other goods.

Some like the VAT because it taxes consumption rather than income. Some argue that an income tax penalizes achievement because it taxes wage growth and investment. But others argue that consumption taxes penalize lower-wage earners because consumption eats up more of their income. So the tax would be a larger proportion of their spending. Income taxes are generally considered progressive, and consumption taxes are regressive.

People across the political spectrum are considering the tax, partly because it can be used to replace other taxes, such as corporate taxes, that are considered more onerous. Besides general opposition to consumption taxes and, of course, to taxes in total, a key argument against the VAT is that it does not address the problem of overspending. Many people say that rather than figuring out how to fund growing government, government should figure out how to stop growing. Others say this is unrealistic, given the inevitable increase in Medicare and Social Security alone, and that a more equitable way to pay for government spending should be devised.

The VAT tax is likely to get more attention over the coming months, because Congress and the Obama administration have been asking for studies on its impact as a basis for future policy.

                        

The exchange is intended to create a more organized and competitive market by establishing standard levels of health insurance plans – labeled platinum, gold, silver and bronze – according to federal rules. With plans offering required benefits, they could be compared with each other. An exchange is supposed to encourage lower prices through retail competition and make it easier for individuals and small groups to shop for insurance. It also makes the coverage portable, because a policy sold through the exchange would not be tied to employment.

Those who can shop in the exchanges are:

• Workers at companies with fewer than 100 employees
• Workers at companies that do not provide health insurance
• People who are self-employed
• People who are unemployed
• Retirees who are not eligible for Medicare.
• Small businesses
• Medium-size and large businesses, after 2017

Exchanges are required to make certain that policies are “in the interest” of buyers. The exchanges cannot set premiums, but they can reject plans if companies cannot successfully justify rate increases. By 2014, companies will not be able to discriminate against those with pre-existing conditions.

If a state opts out entirely, the federal government would be able to set up an exchange.

The legal and tax information contained in these articles is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice concerning your particular circumstances.

                        

For the past 10 years, gold has been surpassing expectations. It had dropped to $272 an ounce in 2000, and, at the time, few thought the price would rise dramatically. But over the past decade the price kept rising – breaking records – until it hit a high of $1,226 in December 2009. With each new record, many observers predicted that the price could not possibly go much higher and that the bubble would burst. As of this writing, the price has dropped to $1,092, with many analysts saying that the bubble has finally burst. But that has been said many times in the past decade, only to be followed by another rally.

Back in 2000, those who predicted higher gold prices were envisioning a worsening economy, which usually drives up the value of gold. It is the standard investment that many turn to for security in uncertain times.

Quite often the price performance is the inverse of the stock market’s, which does better in a stable environment. Some say now that the economy appears to be steadying, gold prices should stabilize or drop. In fact, many financial advisors caution against jumping into the precious metals market, fearing a plummet. Even some of those who previously encouraged precious metals investing are backing off these days.

“It was great to get in about three or four years ago, but now you have to be much more cautious,” Cary Carbonaro, a financial planner with Stonegate Wealth Management of Clermont, Fla., told the Orlando Sentinel. “It has had a huge run-up, but it is a cyclical thing.”

Even George Soros said, during the World Economic Forum in Davos earlier this year, “The ultimate asset bubble is gold,” but then, according to reports, doubled his own investment in gold a month later. That could be because he foresees an increase in inflation, which also drives up the value of gold.

Those who want to jump on the golden bandwagon are advised to be cautious in taking that leap. Even the most enthusiastic advisors still say investors should put only a small percentage into precious metals – 5 to 10 percent of their total investment money at most. Also, most advise their clients to invest in a fund rather than buy the metal itself, mostly for security reasons. After all, what’s the use of an insecure investment meant to bring security in an insecure time?