Know how your mutual fund fees work or you could be paying too much and eroding your return. If you have between $500 and $500,000 to invest, you probably either owned or thought about owning a mutual fund. It may have even been your first investment right out of college or the investment you made through your child’s 529 plan, but how much do you really know about mutual funds?
A mutual fund is made up of funds from a group of investors who (probably) would not have access to professional money management on their own. The funds are professionally invested in stocks, bonds or other securities with the hope of growing the overall investment (more here).
Mutual fund fees can be high and erode your investment if you’re not careful. Typical fees:
- Expense ratio – operating & administrative expenses/total fund assets – the lower the better (1.3-1.5%). Higher expense ratio does not necessarily mean better performance (see more here)
- Redemption fees – usually a flat fee around 1% for withdrawals made within 1 yr of purchase
- Sales fees – also called Load – paid t to the brokerage firm, financial planner or whoever sells the fund to the investor for “services rendered”.
Let’s talk about load, shall we. Loads can be as high as 8%, but are usually between 3-4%, and the fee is deducted directly from the amount invested. If you invest $1000, you’ve just given $40 to the broker for Load only (this example doesn’t include expense ratio). Now you have $3960 to invest and if you understand compound growth, you will know that you want all your money growing for you.
Load does not pay the money manager (part of expense ratio), who is responsible for getting you the best return possible. As a result, Load does not buy better or more expert money management. Also remember, Load is in ADDITION to the expense ratio, it is not included in the expense ratio calculation. So you must ask or research whether there is a Load on a potential mutual fund investment and how much it is.
There is no reason for you to pay Load, especially with the vast availability of no-load mutual funds. If you have a broker (see last week’s post about how your broker makes money), request no-load mutual funds. If he or she cannot sell you no-load mutual funds, you probably should be using someone else to help you manage your money.