With stock mutual funds, you can make a good case that paying for superior management may help you make more money. In fact with hedge funds, wealthy investors pay 2% per year plus 20% of the profit because they feel they will make more money in well managed fund over the long run.
But bonds generally don’t have that potential. You buy a bond to have a steady income, not to make 100% on your investment. So costs count a lot more with bonds and bond funds. Particularly now with rates being so low, bond fund costs can really eat into your profit.
At random I chose the Calvert Long Term Income Fund (symbol CLDAX). The current yield on that fund is 2.5%. Now how much do you think the customer has to pay to be in this fund? ½ a percent maybe? Unfortunately not. Calvert charges a fee of 1.25% per year on this fund. Basically that means that for every three dollars the bond portfolio earns, they keep one of them. It’s very difficult to make money in bonds in this rate environment if you are giving away 1/3 of the income.
Other funds from companies like Vanguard, Black Rock and PIMCO generally charge 0.50% per year or less to manage that portfolio for you. Bond funds are generally not all that different from each other. When all else is equal, choose the lower fee fund, particularly in this low rate environment.