Category: Costs
The Hidden Costs of Mutual Funds
With the push to increase the transparency with what investors pay for advice, one area that is not truly transparent are the costs associated with mutual funds. While mutual funds do disclose their expense ratios, many costs are not published, and can erode your real returns. Here are a couple of examples of these costs, and what you can look out for. Disclosed Costs: The disclosed costs of mutual funds are supposed to be revealed to you. But there are many of these costs. For example, there can be shareholder fees, which can consist of front-end loads, back-end loads, purchase fees, redemption fees, exchange fees, and account fees. There is also the expense ratio, which includes operating costs, management fees, 12b-1 distribution fees, and administrative costs. How much do they cost? According to a study published in the Financial Analyst Journal that was authored by finance professors at the University of California Davis, University of Virginia, and Virginia Tech, the average expense ratio is 1.19%. Hidden Costs: Mutual funds conduct trades, many on behalf of other investors. For example, after you buy a mutual fund, the mutual fund will continue to accommodate other investors as they invest into and divest out of the mutual fund. Their trading on behalf of other investors imposes a cost onto you. There are three sources of these costs. First, mutual funds must pay brokerage commissions when they trade. This cost is shared by all mutual fund investors. Second, mutu
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