How to Compare Fees & Expenses in Different Mutual Funds
Mutual funds have many advantages. You get the services of a professional fund manager and avoid the need to research and track individual securities. Mutual fund portfolios reduce risk through diversification. There are many types of mutual funds, so it's not hard to find ones that are suited to your financial goals. However, these benefits come with a price. Mutual funds must charge fees and expenses. Those costs lower the return on your investment. One key to choosing mutual funds lies in knowing how to compare fees and expenses in different mutual funds.
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Instructions
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Get copies of prospectuses for the mutual funds you are interested in. To meet SEC requirements, mutual funds must include a complete disclosure of all fees and expenses in the prospectus, as well as other information you will need. Most fund companies make the fund prospectus available online. If that's not the case for a particular fund, the website (or your broker) will provide an investor contact number to order a copy of the prospectus.
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Use a mutual fund comparison calculator to enter and process the information for the funds you are investigating. Do this manually by totaling the annual fees and expenses for a given size of investment and then subtracting the cost as a percentage from projected fund earnings (based on past performance). However, this is time consuming. The SEC and the Financial Industry Regulatory Authority (FINRA) both provide free online tools to crunch the numbers (See links in Resources).
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Look in the prospectus to determine if the fund charges a load (sales commission). Load funds deduct a percentage of your investment to pay brokers and financial advisers for bringing investors to the fund.
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Look for "12b-1" fees. These are ongoing fees charged as an annual percentage of your investment. Load funds often charge up to 1 percent per year. Some no-load funds also charge a 12b-1 fee, but the percentage is lower.
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Examine the expense ratio and transaction fees. All funds levy fees to cover operating expenses, and these are summarized by the expense ratio. It tells you how much goes to pay expenses as an annual percentage of the fund's assets. Transaction fees may be charged for purchase and sale of shares.
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Enter the fees and expenses data for each fund into the comparison calculator. You'll also be asked to enter the time frame of your investment and expected return. For example, you might enter $10,000 and a desired return of $20,000 after 10 years. The software will generate a report telling you what annual return you will need from each fund to achieve your goal. Compare this to the funds' performance history to decide which fund offers the best investment.
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Tips & Warnings
Fees and expenses aren't everything. Consider the experience and track record of the fund manager. It's also helpful to look at the makeup of the portfolio to ensure that the investments are adequately diversified and don't carry more risk than you are prepared to accept. Finally, examine the services and options a mutual fund offers. This information is also contained in the fund prospectus.
