Fees and Costs of Mutual Funds

Mutual fund fees have been falling in recent years, but they can still cost you a lot if you’re not paying attention. Fees in 2018 averaged $48 per $10,000 invested, down from $93 in 2000, per a Morningstar report — but mutual fund companies are still raking in tens of billions of dollars in fees annually.

You can pay a lot less in fees by parking your long-term dollars in broad-market stock index funds, such as those tracking the S&P 500 index of major American companies. Index funds are passively managed: Their managers simply invest in the same securities as the index they track; they aren’t busy studying companies to decide which to buy or sell. Thus, it’s not surprising that the average fee charged for passive funds in 2018 was only $15 per $10,000 invested — and with some companies, it’s much lower. Vanguard, for example, averaged just $9.

A mutual fund’s expense ratio, or annual fee, is clearly listed, but there are other costs to owning mutual funds. For example, if a fund’s managers are selling and buying various securities frequently, you’ll end up with short-term gains, which generally face higher tax rates than long-term gains; any commission costs for all that trading will be passed on to you.

You can assess how busy managers are by looking at a fund’s “turnover ratio,” the percentage of the entire value of the fund that’s traded over the course of a year. Favor funds with lower ratios, ideally 30% or less.

Another way to lose money in funds is to be impatient with good funds. Stocks and stock-based mutual funds don’t grow in value at a consistent rate; expect some volatility and down periods. And if an actively managed fund doesn’t outpace its benchmark index (the index to which its performance is compared), consider just switching to a simple, low-cost index fund. Index funds tend to outperform most managed funds, anyway.

You can learn more by searching for the terms “mutual funds” and “Motley Fool” using Google.