What Are Mutual Fund Fees And How Important Are They?




Mutual Fund Fees Are Often Used In Marketing Pitches To Promote A Fund.

However... it does not make sense to invest in a fund which charges low mutual fund fees... but provides poor returns.

All mutual funds... including no load funds... charge a fee.

It is called the annual expense ratio... and varies from fund to fund.

The annual expense ratio is reflected in the value of each mutual fund share (NAV or share value). Therefore... it does not show up as an individual charge on your statement.

NAV is calculated daily at the end of each business day Monday through Friday.

The calculation is simply...

Total Assets minus Expenses divided by Number Of Outstanding Shares equals Net Asset Value (NAV).

The annual expense ratio (Expenses referred to in the formula) is made up of the mutual fund costs and expenses incurred to manage the fund.

Some funds within a category charge very little. Others within the same category charge substantially more.

Generally, the largest range of fee variation is seen between categories of funds more so than between similar funds within the same category.

The reason is... it costs very little to manage a US government bond fund compared to managing an international stock fund.

Hence... the fees for government bond funds fall within a much lower and narrower range than do the fees for the international stock category.

That being said... you should look for funds within the category who's fees are either average or below average for that category.

At the same time... it is important to realize that fees are the least important criterion when it comes to choosing mutual funds.

This is true even though low fees are often used as one of the primary marketing pitches in regard to advertising funds.

Do not make the mistake of believing that lower costs automatically means higher returns.

It does not.

Even though lower fees will allow the fund to invest more of your money for you... it does not mean that the fund will produce superior results.

In fact, fund companies that use low fees as their foremost marketing pitch may do so due to poor investment return history.

I don't want to sound like a broken record... but let me repeat once more... it does not make sense to invest in a fund which charges low fees but provides poor returns.

So... when it comes to mutual fund fees... you should consider them last.

Fees come last because they are of least importance when it comes to choosing the best mutual funds.

If you consider them any sooner than last... when scrutinizing funds... you might overlook some outstanding choices.

"Because It Matters"... Jim

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