Mutual Fund Expenses

Ben Franklin's aphorism could have been written to describe mutual fund expenses. Everyone is familiar with the disclosure "past performance is no guarantee of future performance." It is however equally true that past cost is often an excellent indicator of future cost.

Mutual funds, like all businesses, have operating costs. These costs are charged to the fund's shareholders in a variety of ways and include "shareholder fees" and "annual fund operating expenses." Shareholder fees are sales or redemption fees paid by individual shareholders when they purchase or sell shares in a fund. Annual fund operating expenses are charged to all shareholders and paid out of the funds held in common.

Expenses vary across the industry and high expense funds can have a huge negative impact on shareholder returns. For example, if you invested $10,000 in a fund that produced an 8% annual return before operating expenses of 1.4%, after 20 years your investment would have grown to approximately $35,300. But if the fund had expenses of only .09% you would have $45,800. The difference of $10,500 is larger than your original investment!

The fund with the higher operating expense must outperform the market by the higher amount just for the shareholder to break even relative to a low-cost index fund. To learn more about mutual fund expenses see Mutual Fund Fees and Expenses on the SEC website.

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