Mutual Funds/Mutual Fund Expenses



A mutual fund charges an annual fee for investing in the fund.  Is this the only fee that the mutual fund owner pays?

Does he also pay for the trading that occurs within the fund and is this charge hidden from the mutual fund owner?

I thank you for your reply.

ANSWER: Dear Kenneth:

A mutual fund may levy a sales charge--a "load." It may be upfront or when you sell your shares. Many funds are "no-load." But even these have continuing expenses.

The continuing expenses are for buying and selling shares, for paying staff, for sending messages to shareholders, for bookkeeping, and so forth.

I hope this helps.


---------- FOLLOW-UP ----------


I want to thank you for the reply.

Are these "continuing expenses" fees hidden from the investor who invests in the fund or are they included in the fund's annual fee?

Hi Kenneth--

A fund’s expense ratio is your best guide to determining how cheap or expensive a fund is.

The expense ratio is the percentage of a fund's assets that goes toward the cost of running the fund. The expense ratio covers the investment advisory fee, the administrative costs, 12b-1 distribution fees, and other operating expenses. But NOT the cost of trading. A fund with a hugh turnover will typically have higher trading costs.

Larger funds have economies of scale—which is why a fund’s assets are brought into the picture.

A lousy fund will have a high expense ratio—because shareholders will have left and reduced the assets. Oppenheimer Commodity Strategic Return has an expense ratio of 1.73%. Rated below-average by Morningstar. Vanguard Wellesley Income, a fine fund, has an expense ratio of 0.25%.

1.5% is the  current average expense ratio of an actively managed fund—as opposed to an index fund.

The investment advisory fee or management fee is the money paid to the managers of the mutual fund. On average, this fee is about 0.50% to 1.0% annually of the fund's assets.

Administrative costs are the costs of record keeping, mailings, maintaining a customer service line, etc. These are all necessary costs, though they vary in size from fund to fund.

A 12b1 fee is for publicizing the fund. Not desirable.

Stock funds have higher expense ratios than bond funds; foreign funds also have higher expense ratios.

Best, Warren

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Warren Boroson


Author of "Keys to Investing in Mutual Funds" (Barrons), "Ultimate Mutual Fund Guide" (Probus), "How to Pick Stocks Like Warren Buffett" (JKLasser), and "The Reverse Mortgage Advantage" (McGraw-Hill). Former financial columnist for Gannett News Service.


Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD) about mutual funds and a newsletter, FundDigest.

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