How much are you paying your mutual fund?
Oct 02 2009
The quickest and easiest way to increase your investment return is to eliminate unnecessary expenses. This is another one of those “not-so-secret secrets of successful investing” that everyone understands but few seem to follow.
It is amazing how many investors have no idea how much they are paying in annual mutual fund fees. Some even say “Oh, I don’t pay anything because I only buy no-load funds.” But while it is true that “no-load” funds don’t carry sales charges (commissions), all mutual funds have management fees.
The average equity mutual fund charges management fees of around 1% a year (bond funds generally charge less) which may not seem like much at first glance. So when a client hears that he is paying 1% a year it doesn’t always register. But it never fails to get his attention if I add, “That means you are paying $2,000 a year on your $200,000 investment.” Then it becomes real money.
Of course cost is only part of the story. What really matters is value: are you getting fair value for what you pay? That subject will have to wait for a future article. In the meantime, if you are unsure about what you are paying you can ask your advisor or read the fund’s prospectus. An easier way to check is to go to www.morningstar.com and type in your fund’s five letter ticker symbol. Under the Expenses tab you can see both management fees and 12b-1 fees (which cover distribution costs including deferred sales charges paid to brokers). For maximum effect convert that percentage into actual dollars.
