Allocation Rate

The Allocation rate helps you to pick a mutual fund with fewer expenses. If this rate is high then the amount of money that actually benefits from the investment is much greater.

For example say a mutual fund has an initial front end cost of 3%. That means your investment will get charged 3% and only after that the remaining 97% of your money will go towards the investment.

So this is a very important factor to consider. If the percentage of your money that actually goes towards the investment is below 90% or even below 95% then it probably isn’t a very smart thing to do.

You have to remember that the more money a mutual fund takes from your account when you first put it in there marks what you have to make just to break even. If the fund charges you 10% of your money for investing with them that means you only have 90% left.

To break even during your first year you would have to make at least 11.11% on your money. If you factor in inflation you have to make an additional 3-4% of your original investment on top of that in order to have the same buying power 1 year from now then you do now.

Considering that the average stock market return is 10% and most mutual funds don’t beat that return you are going up against the odds here.

That is why if the mutual fund is charging you an arm and a leg to invest into it, it is probably not going to be worth the investment.

Finding a fund with the lowest costs is something to consider, but not the only thing. If the fund has been making great performances over time then it might be worth investing into even after the expenses they charge.

But before you invest it is a good idea to look at what the fund is charging you and figure out what kind of a return you have to make in your first year to make up for that loss and to make up for inflation. If it doesn’t make sense to pay such high fees then it doesn’t make sense. No point in making someone else rich because you don’t want to read the fine print.