In order to produce the podcast and keep content up free for you, I work with partners so this post may contain affiliate links. Please read my full disclosure for more info.
After watching a segment from Jay Leno, it occurs to me that personal finances is something that we shouldn’t take for granted.
Mutual Fund Expense Questions
Investing is a wonderful way to grow your money, but the financial terminology associated with it can scare some people.
What is a mutual fund?
I searched online to get a concise definition and found one that works.
Wikipedia describes it as:
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.
What is a loaded mutal fund?
It’s basically a mutual fund with an extra sales cost. If you have a front load mutual fund, you pay to buy into the fund.
If you have a back load, you pay when you sell your fund. A no load fund may have administrative costs, but it is not supposed to have a sales cost.
Does a loaded mutual fund benefit me?
….that there is no real difference historically between the performance of load funds and no-load funds in terms of year-to-year performance.
In fact, according to the latest survey by the mutual fund data analyzer Morningstar, even excluding the drag on returns if the load were included in the calculation, no-load funds actually have a superior record to load funds over the last 3-year and 5-year periods.
This fact is also confirmed by U.S. Securities and Exchange Commission. So when you’re paying 5% to invest in a mutual fund, your mutual fund has to gain 5% just to break even.
How can a loaded mutual fund hinder me?
The money comes from you, so you’re the one losing out. If you have a 5.75% front load instead of investing $300 a month, you’re investing $284.25.
That might not sound like a lot, but it adds up over time. There is also no proven advantage into getting a loaded fund versus a no load fund with the same performance level. Ramit Sethi also wrote about the mutual funds and fees. In fact, he found over 85% of mutual funds don’t beat the market.
Where can I find a no load mutual fund?
I would start off looking at Yahoo Finance Fund Screener to see what options are available.
Some brokerages you may want to look at include:
Investing doesn’t have to be as complicated as people make it out to be. You just have to take some time to understand the terms that brokers and investors use.
What are expense ratios?
What is the actual definition of an expense ratio? I went online to get information and Google defines it as:
- The percentage of a fund’s assets that are used to pay its annual expenses.
- The percentage of total investment that shareholders pay annually for mutual fund management fees and operating expenses.
- A comparison of the costs of owning and operating something to its potential gross income.
What does that mean for me as an investor?
This percentage is taken back by the fund as a compensation for running the fund.
It covers operations and management fees. Motley Fool points out that this money comes out of your return.
Another interesting point that the Fool.com site brought up:
Because the average large-cap value fund charges 1.17% more than the index, it has to outperform by at least that much to create value for investors — and more (maybe a lot more) if sales charges are involved.
That’s a high hurdle for fund managers, many of whom trip and injure their clients’ portfolios in the process.
What’s a good expense ratio to look for?
In generally it appears that lower is better, but you have to factor it the performance of your fund. After all, what good is a lower expense ratio if your fund does poorly?
My Take on Mutual Fund Expenses
In general, I would pass on paying for a loaded fund. I’s much easier and financially sound to get a low cost index fund.
How about you? What do you invest in?
Build Wealth Together
Stop worrying about money and start dumping your debt and building wealth as couple!
Get our free guide on how to hack your goals. Make 2019 your best year ever!