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CostHelper > Personal Finance  > Taxes & Financial Planning > Mutual Fund

Mutual Fund Cost


How Much Does a Mutual Fund Cost?

 

Also called an investment company, a mutual fund pools money from many investors, with the buying and selling decisions made by a professional money manager guided by the fund's official strategies and objectives.

Typical costs:

  • Mutual fund costs include the fees you pay when you buy, sell or exchange your shares, and for ongoing operating expenses.
  • Sales charges may apply when you buy mutual fund shares (called a front-end load) and if you sell within a certain period of time (a back-end load); funds without a sales charge are called no-load. On a $10,000 investment with a 4.5 percent front-end load, the sales charge would be $450, leaving $9,550 invested in the fund.
  • No-load funds may still charge purchase fees, redemption fees, exchange fees and account fees, and have annual operating expenses of up to 0.25 percent annually. Generally customers order no-load shares directly from the mutual fund, rather than working with a financial advisor or sales rep.
  • Total annual fees for any mutual fund can be up to 2 percent, and are usually reported as the expense ratio of the fund. This includes up to 0.75 percent for what is legally known as 12b-1 fees, which pay for marketing and distribution. According to the Securities and Exchange Commission[1] , $10,000 invested in a fund with a 10 percent annual return and a 1.5 percent charge for operating expenses would be worth roughly $49,725 after 20 years; if the fund expenses were only 0.5 percent, the 20-year value would be about $60,858, or an 18 percent difference.
  • NASD has a mutual fund expense calculator comparing the impact of fees from three different funds.
  • Mutual funds are relatively easy to obtain and they spread investments over a range of stocks, picked either by the fund's manager or a formula. Butt there's no guarantee of success; the biggest cost of a mutual fund could be if it loses money.
Related articles: Stock Broker, Financial Planner, IRA, Credit Card

What should be included:
  • The SEC gives a brief overview of how mutual funds work[2] and the various types, such as money-market, bonds or index.
  • Mutual funds usually target specific types of investments, such as high-tech stocks or municipal bonds. They can also reflect personal views: Pax World Balanced was one of the first "socially conscious" mutual funds. It got high marks from Consumer Reports, as did The Greenspring Fund[3] . There are various mutual funds targeting everything from environmental sustainability to religious values, but an article at MSN.com argues that personal beliefs don't necessarily lead to profitable investment choices.
  • Usually there's a minimum initial requirement of $1,000 or more, although sometimes it's waived for regular, monthly investments or when buying the shares with money from an IRA savings account.
  • The advantage of professionally managed funds is that someone else is making the buying and selling decisions for particular stocks, bonds or other investments; the disadvantage is that someone else is making the decisions, according to The Motley Fool[4] .
Additional costs:
  • A fund's turnover rate shows the percentage of its holdings that change each year. Buying and selling stocks costs money, so a high turnover rate means higher expenses. Turnover rates vary dramatically, from 5 percent or less, to as high as 85 percent.
  • For small investments (for example, $2,500 or less), mutual funds may charge an annual maintenance fee of $15-35 or more.
Shopping for a mutual fund:
  • The Massachusetts Securities Division gives an overview of what to consider in selecting mutual funds. A mutual funds' fees, objectives and level of risk are legally required to be listed in the fund's prospectus; its statement of additional information gives added details, such as an audited financial statement and a list of holdings. If an annual report is available, read that as well.
  • While most advertisements, rankings and ratings stress a mutual fund's past performance, the SEC[5] says that studies show that is no guarantee of the future; fees and expenses may be a more reliable predictor of performance.
  • The Mutual Fund Education Association, a nonprofit trade group, lists ways to buy mutual fund shares[6] and provides links to the leading mutual fund companies[7] .
  • The Investment Company Institute, a national association of mutual fund companies, gives links to its members.
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External Resources:
  1.  www.sec.gov/investor/pubs/mfperform.htm
  2.  www.sec.gov/answers/mutfund.htm
  3.  www.greenspringfund.com/
  4.  www.fool.com/investing/beginning/what-should-i-invest-in.aspx
  5.  www.sec.gov/investor/tools/mfcc/mfcc-int.htm
  6.  mfea.com/
  7.  mfea.com/decide/investment_tools/fund_companies.fs
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