Mutual Fund Expenses

Mutual Fund Expenses

Mutual funds is one of the most popular investment vehicles for retail investors. There are thousands of mutual funds and one of the best ways to select the bust fund is to take a closer look at the mutual fund expenses. One of the determining factors an investor can use when selecting their mutual fund is the expense ratio. This ratio is computed by dividing the fund’s total annual operating expenses by the value of all securities held by the fund. There are five main components of mutual fund expenses: (1) management fees, (2) legal fees, (3) administrative costs, and (4) marketing fees.
 

Management Fees

Management fees are the monies paid to the fund managers responsible for handling investment decisions of the mutual fund. For the majority of the time the fee is paid regardless of whether the fund makes money or not. Management fees typically range from 0.5% to 1% of the fund’s assets per year. 
 

Legal Fees and Administrative Costs

Legal fees are related to all of the costs associated with creating legal documentation, court cases and retainers. Regardless of how much information you provide or documentation a client will sign wavering you from any responsibility, there is always someone that will come after you with a suit.
 

Administrative Costs

Like all businesses, mutual funds need a back office to process paperwork, account management, etc. With the advent of computers and technology, many mutual funds outsource their back office tasks to companies that specialize on these activities. This allows the mutual funds to lower operating expenses and focus more on their trading. 
 

Marketing Fees

Mutual funds are allowed to market their companies and services via televisions, print, and radio. Some firms pass these costs on to their clients which is known as the 12b-1 fee.
 

Summary

In summary expenses are a part of doing business with mutual funds. You the investor will have to determine relative to the amount of expected return, what you are willing to pay on an annual basis. Another thing to note is that the expenses will vary depending on the structure of the mutual fund. Currently the expense ratios for stocks are 1.5% per year, just under 1% for bond funds, and .6% for money market funds.

Tim Ord
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