Yet shareholders routinely take a careful look at fund expenses, often using them as a key variable in choosing between two otherwise-similar funds. Why?

Partly it's because expenses are more stable and thus more predictable than performance, increasing the likelihood that low-expense funds will fare better in the future. In the case of bond and money market portfolios, whose returns tend to cluster together, expenses play an especially critical role.

A fund's expense ratio, which pegs key operating costs as a percentage of total assets, is listed in the prospectus. On average, bond funds charge expenses of about 1%. Stock funds are more costly to run and impose expenses of 1.4%, on average. In extreme cases, fund expense ratios can exceed 2.5% and even 3%. Because high costs exert a drag on performance, they should be viewed as an immediate red flag.

An ongoing marketing charge known as the 12b-1 fee is included in expense ratios if applicable. But, as noted earlier, the sales charges, or loads, that some funds impose are not included. Still, they are worth noting. Years ago, load funds used to levy an 8.5% charge--representing a cost of $85 for each $1,000 investment--but such stiff levies have virtually disappeared. Prodded by competition from no-load companies--which deal directly with investors, cutting out the middleman--load groups in recent years have been forced to lower their charges. Today, levies above 5.75% are rare.

The key point to remember about loads is that the money collected from these marketing charges goes to pay the broker or financial planner who sold you a fund; it's not retained by the fund company itself. All fund groups generate revenue in the same way, by imposing a management fee on shareholder assets. These fees, which are part of the expense ratio, typically run between 0.5% and 1%, representing a yearly charge of $5 to $10 for each $1,000 investment.