Some mutual funds are loaded with fees, which is not necessarily a bad thing.
If the fund is making you a return that you’re happy with, then high fees are not a problem.
But as an informed investor, you should understand the truth about the fees in any fund you invest in. You should know what you’re paying-don’t you think? It doesn’t hurt to ask tour advisor what are you being charged.
There are generally three types of fund fees (one of which is not evident in their prospectuses):
1. Management Fees. These fees pay the smart people who actually buy and sell the securities in your fund and do the investment research.
In addition, these fees pay the accountants and attorneys who audit the fund, prepare the prospectus and provide professional oversight.
These fees also pay the members of the board of directors. Also included are printing and postage expenses.
All funds have management fees, as no fund will manage your money for free.
However, some funds have management fees a lot lower than others do.
A few funds have fees less than 1/10th of 1%.
At the other extreme, there are a handful of funds that charge their shareholders for 3% annually and more! So it pays to shop!
2. 12b-1 Fees. These are fees that the fund takes from your account to promote its own fund. These fees gets applied to advertisement for new fund shareholders and pay securities brokers to provide you service.
It may seem a little unfair that your money is being used so that the fund can attract new investors and have your securities broker convince you to remain in the fund. But that’s exactly what a 12b-1 fee do.
Some funds have 12b-1 fees, others do not.
3. Turnover Costs. The prospectus of every fund shows you the fund turnover, but does not translate into what turnover actually costs you.
Turnover measures how often the fund is buying and selling. A fund with 100% turnover means that it completely turned over its portfolio during the year.
Other funds, index funds for example, which are designed to match an index such as the S&P 500, have turnover rates of less than 10%.
Why is turnover important? Because it’s expensive. As of 12/31/15, of the 15,986 funds in the Morningstar database, 5,118 had turnover rates exceeding 100%. Check out this link for more on turnover: http://news.morningstar.com/articlenet/article.aspx?id=304376
According to a study conducted in 2002 by Personal Fund, the average turnover cost was 1.9% for domestic equity funds.
When you add up the management fee, the 12b-1 fee and the turnover costs, it’s not hard for a fund to have total costs exceeding 3%!
So if you have $50,000 invested in a fund with costs of 3% that costs you $1,500 every year. That may not be so bad until you take a look at the taxes…
Don’t just disregard this article. Don’t think there is nothing I can do….because, there is.. And it starts with you knowing!! Happy Investing… Ken