Mutual Fund Expenses and Fees
Arthur P. Mellard -
-
Like any business, running a mutual fund involves costs
too. It should be clear that mutual fund costs and other
fees are detrimental to investment
returns.
Like any business, running a mutual fund involves costs too.
These costs are in connection with maintaining transactions of
investors such as purchases, exchanges and
redemptions.
Besides, in mutual fund expenses there are operating costs of
the fund which are overall costs for maintaining the fund and
not related to any one particular investor such as advisory
fee, marketing and distribution expenses, brokerage fee,
transfer agency fee, legal and accounting fee.
Fund Operating Expenses
For certain direct expenses, the investor is charged directly
at the time of the transactions. These charges and fees are
usually declared in a table in the fund prospectus. However,
there are some mutual fund expenses which are operating
expenses and happen at regular intervals, irrespective of the
number of investors in a fund. These expenses are paid out of
the fund assets and are mentioned in the fee table in the
prospectus under the heading annual fund operating
expenses.
Management fee is a part operating mutual fund expenses to
cover administrative expenditure incurred on advertising,
brokerage fee, telephone, printing, etc. Distribution fees are
also mutual fund expenses paid for marketing and selling of
fund shares, compensating brokers and agents who sell mutual
fund shares, paying for sending mailers, prospectuses to
probable new investors, and printing of sales literature.
However, according to government regulatory agencies, these
expenses cannot exceed a stipulated percentage of the fund’s
average net assets per year.
Other mutual fund expenses not included in management and
distribution fees are legal expenses, custodial expenses,
accounting expenses, transfer age expenses and other
administrative expenses. The total annual fund operating
expenses are expressed as a percentage of the fund’s overall
average net assets.
For a fund to perform and do well, the operating costs have to
be low. Small differences in fees can exemplify into large
differences in returns over a period of time. For example, in
an investment of $10,000 earning an annual return of 10% before
expenses which is 1.5%, then over a period of 20 years the
return would be around $49,725. But, if the fund had a low
operating expense of 0.5%, then the investor would end up
earning $60,858. Even though the fees and other mutual fund
expenses seem like a minor expense, they create a serious drain
on the performance over a period of years. It should be clear
that mutual fund costs and other fees are detrimental to
investment returns.
RESOURCE BOX
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Source: http://www.mutualfundperformance.net/Mutual-Fund-Expenses.html
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