Myth of Mutual Fund Fees
Mutual funds combine funds from a pool of investors to invest in many types of assets. Pooling investor resources allows the mutual fund manager to take advantage of broader diversification and lower investment costs. Many myths surrounding high mutual fund fees have basis in historical fact, but legislation has alleviated many of the historical mutual fund fee problems.
Other People Are Reading
-
History and Loads
-
Beginning in 1981, lawsuits challenged fees charged by mutual funds as being excessive and that conflicts of interest existed in fee charges. The numerous lawsuits that occurred after 1981 caused examination of mutual fund myths in the context of economic theory. Mutual funds have advisory fees along with load fee and no-load share classes, and many investors believe they do not pay advisory fee expenses when the mutual fund has a load. This is not true, because a load is nothing more than a sales commission, and the fund still charges advisory fees based on the share class of mutual fund purchased.
Myth of Ownership
-
A common myth is that shareholders of the mutual fund own any investment returns generated by the mutual fund. Mutual funds are open-ended, which means an investor can buy or sell the mutual fund at any time. Economic theory and the structure of mutual funds dictate that share owners not own generated investment returns, only that they have a share of the underlying assets at some point in time. Investors in a mutual fund are essentially competing for a mutual fund manager's skill, which includes paying the fees associated for that service.
-
Advisory Fee Myth
-
There is a myth that arises from time to time stating that a reduction in advisory fees charged will result in a corresponding increase in asset total return. Normal investors calculate investment returns as net gains after fees, because many factors contribute to advisory fee pricing. For example, an all-fixed-income mutual fund that invests in obligations of the United States Treasury will have a lower advisory fee than a fund investing in stock. The myth that reducing advisory fee prices will have a corresponding increase in return is not true.
For the Truth
-
To determine the truth regarding net expense ratios of mutual funds refer to the mutual fund prospectus. While the prospectus is full of complicated legal language, most mutual fund companies offer a fund fact sheet that breaks down fund expense ratios in a format that's easier to understand. The investor should pay particular attention to the share class, expense ratio and sales charge or load associated with the mutual fund.
-
